In the Market: Fed piloting another tricky soft-landing
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The Federal Reserve (Fed) is working towards achieving a soft landing for the U.S. economy by reducing cash in the financial system without disrupting markets. The Fed has already removed $1.4 trillion as it shrinks its balance sheet, and the focus is now on determining when to stop. The challenge lies in determining the right level of cash reserves in the banking system to prevent market freeze-up. Fed Chair Jerome Powell stated that policymakers are monitoring various indicators in money markets to determine when they are getting close to the right level. The Fed is trying to transition from abundant to ample reserves without making them scarce, but market signals are noisy and hard to interpret. The indicators being watched include bank reserves, key interest rates in money markets, and cash parked in the Fed's overnight reverse repurchase agreement facility. Market participants believe that the Fed is taking a more accommodative stance and has a decent shot at engineering a soft landing. It is expected that the Fed will announce tapering as early as May, reducing the cap on the amount of Treasuries it aims to offload every month by half to $30 billion. The Fed's drawdown of reserves is crucial to avoid sudden spikes in rates that could disrupt Treasury markets and funding for firms. Estimates of the minimum amount of bank reserves needed range from $2.5 trillion to $3.3 trillion, while current reserves total about $3.5 trillion. The distribution of reserves across banks is uneven, making it harder to determine what is sufficient. The Fed is also monitoring money market indicators such as the Fed funds rate, the benchmark Secured Overnight Financing Rate (SOFR), and the interest on reserve balances (IORB) that the Fed pays to banks. The Fed would want the Fed funds rate to be about 10 basis points higher than the current level and SOFR to go up 10-15 basis points higher. The rate would gradually rise as reserves fall, but imbalances in supply and demand could cause brief rate spikes. Traders and investors can access the full article by logging in or creating a free account.



https://www.tradingview.com/news/reuters.com,2024:newsml_L2N3G434T:0-in-the-market-fed-piloting-another-tricky-soft-landing/