Given the central bank’s long-running goal of leaving enough liquidity in the financial system to allow for firm control of short-term rates and normal money market volatility, Powell said “we may approach that point in coming months, and we are closely monitoring a wide range of indicators” to know if that has happened.
As a signal the end stage is getting closer, “some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates,” Powell said at a gathering held by the National Association for Business Economics in Philadelphia.
In his remarks, Powell also defended the central bank’s use of the balance sheet and other tools for monetary policy.
The endgame for QT has been a topic of market debate for some time but has gained urgency over recent weeks as the Fed’s reverse repo facility, or RRP, has fallen to effectively near-zero usage. The RRP tool helps set a soft floor underneath short-term rates and assists the Fed in keeping its interest rate target within the desired range, now set at between 4% and 4.25%. That facility peaked at $2.6 trillion at the end of 2022.
The RRP facility has largely existed to mop up the excess liquidity the Fed created during the pandemic and now that it has been effectively drained out, QT will now lower reserves.
The further reserves fall, the more likely liquidity scarcity could emerge with little warning and rattle money markets, in turn complicating the Fed’s ability to keep its monetary policy interest rate target where it wants it to be.
Something like that played out in September 2019 during the last period of QT, forcing the Fed to intervene unexpectedly to add liquidity back to the system. Since then, the Fed has added something called the Standing Repo Facility – it provides fast cash loans to eligible financial firms – as a shock absorber for market liquidity needs.
Money markets and the Fed got through the end of the third quarter smoothly, with markets not needing to turn to the Fed for liquidity needs in any substantial size.
STILL NOT ENTIRELY CLEAR WHEN QT MIGHT END
The QT process, which has been running since 2022, is designed to remove excessive amounts of liquidity the Fed added to financial markets during the COVID-19 pandemic. Cash was pumped into the financial system via large-scale purchases of Treasury and mortgage bonds, which were aimed at stabilizing markets and providing stimulus when the Fed’s short-term rate target was at near-zero levels.
The asset buying helped Fed holdings more than double to around $9 trillion. Allowing a set amount of bonds to mature each month and not be replaced has helped take the Fed balance sheet down to $6.6 trillion.
It’s unclear how much further the Fed can go with QT but some officials have said there remains plenty of liquidity in the financial system. Powell did not say how far the Fed would be able to shrink its holdings.
A survey of large banks, money managers and others conducted before the Fed’s September 16-17 Federal Open Market Committee meeting projected a January 2026 end-date for QT, with the overall size of the Fed’s balance sheet at $6.2 trillion. Survey respondents also said they saw bank reserve levels at $2.9 trillion from their current level of $3 trillion.
FED CHIEF DEFENDS USE OF BALANCE SHEET, OTHER TOOLS
Powell noted in his remarks that broadly speaking, “our ample reserves regime has proven remarkably effective for implementing monetary policy and supporting economic and financial stability.”
The Fed’s usage of its balance sheet as a policy tool, as well as the tools it uses to help manage interest rates, has been controversial, no less so than with the current Trump administration. Treasury Secretary Scott Bessent has accused the central bank of broad mission creep with the use of the balance sheet, which he believes has distorted financial markets.
The Fed has also caught heat for its interest rate management tools, which have paid out so much money to eligible financial firms that the Fed is now managing a $244 billion loss, causing some politicians to weigh whether those powers should be removed.
Powell cautioned against such a move, saying “if our ability to pay interest on reserves and other liabilities were eliminated, the Fed would lose control over rates.”
To get it back, “large sales of securities over a short period of time would be needed to shrink our balance sheet and the quantity of reserves in the system,” Powell said, adding “the volume and speed of these sales could strain Treasury market functioning and compromise financial stability.”
Reuters
According to Bloomberg.
As far as China is concerned, America started it. Earlier this week, US Treasury Secretary Scott Bessent blamed Beijing for the most recent blowup of ongoing efforts to resolve the trade war triggered by President Donald Trump. On Thursday, it was Wang Wentao’s turn: The Chinese commerce minister said recent escalations are a result of White House actions following talks in Madrid last month, blaming the “intensive introduction of a series of restrictive measures against China” for setting off the current spiral of threats.
Shortly after those negotiations led by Bessent and Chinese Vice Premier He Lifeng, the US commerce department widened the application of sanctions to companies affiliated with blacklisted Chinese firms. Beijing has justified its decision to tighten control of rare-earth elements as a defensive reaction, one that’s apparently put the US on the backfoot as Bessent floats trial balloons about a new truce.
Whether that cools things down remains an open question. On Thursday, Wang said the US measures “seriously harmed China’s interests and undermined the atmosphere of the bilateral economic and trade talks.” —David E. Rovella
The only real data that came out this morning indicate nothing positive.
Philadelphia Fed Manufacturing Index (Oct)
Act: -12.8 Cons: 8.6 Prev: 23.2
Philly Fed Business Conditions (Oct)
Act: 36.2 Prev: 31.5
Philly Fed CAPEX Index (Oct)
Act: 25.20 Prev: 12.50
Philly Fed Employment (Oct)
Act: 4.6 Prev: 5.6
Philly Fed New Orders (Oct)
Act: 18.2 Prev: 12.4
Philly Fed Prices Paid (Oct)
Act: 49.20 Prev: 46.80
Congrats to all those who are long SLI
Picked up some at some at 4. Thanks for the tip!
Agh. Should have known. On the bright side, Morgan Stanley is the underwriter.
SLI didn’t tank too bad, with recent volume the offering should quickly close. However it seems this company is only exploration and doesn’t have anything mined yet, also it was a sympathy play on LAC. I would suggest taking profits if you have them, then focus on USA mining and mineral material companies. I think most are at all time highs too, but there may be a few that haven’t popped yet.
I never thought I would see CAT above 500. Years ago an insider got mainstream news attention for saying that CAT had trillions of dollars in the Caymen Island banking system. I should have bought in and held on that statement.
China spoke of “mutual respect” and “peaceful coexistence,” but Scott Bessent described a very different encounter when a top Chinese trade official arrived in Washington recently. The US Treasury chief said the negotiator turned up uninvited and acted “unhinged.” Still, Bessent left the door open to a longer-term truce, even as the hardball continues.
The US is taking steps to block one of Hong Kong’s largest phone companies from accessing American telecom networks. And Bessent signaled an emerging united front among Group of Seven nations and others with regard to China’s new rare-earth export curbs. Meanwhile, Chinese hackers are being blamed for a potentially “catastrophic” breach of a major US-based cybersecurity provider.
One piece of economic data this morning and it looks pretty good to me.
NY Empire State Manufacturing Index (Oct)
Act: 10.70 Cons: -1.80 Prev: -8.70
Just bought a couple hundred shares of ASPI at $12.55 in pre-market. Will buy more if price falls, especially below offering price.
Seeking Alpha News
The Janus Program
The biggest portable generators for the U.S. military these days have an output of about 800 kilowatts. While that might be enough to power major systems, the weapons and radar of the future are changing, and the need for more power is of the essence. There are already serious concerns about energy supply given aging and strained power grids, as well as worries over disruptions like cyberattacks and other malicious forces.
The solution? Going big in the nuclear game by building on Project Pele. The newly announced Janus Program aims to supply microreactors to bases by 2028, which would be small enough to move by truck or aircraft. These tiny reactors will generate anywhere up to 20 megawatts of electricity, but more importantly, they will not need to be refueled constantly, yielding power savings and assisting logistics in hard-to-reach areas. It’s all aimed at helping keep American forces ready on the home front and across remote locations, as well as maintaining critical base operations on a 24/7 basis. Trump signs executive orders aiming to expand nuclear power
“Energy is not one sector of the economy. It’s the sector of the economy that enables everything,” Energy Secretary Chris Wright said at the annual conference of the Association of the United States Army in Washington. “Ultimately, and not in the too far future, you’ll be able to place a reactor at a forward-deployed base, produce multiple megawatts of power, and it’ll run for years, potentially decades, without any refueling or any reservicing.”
Who stands to benefit? While the U.S. Army and Energy Department will supply uranium fuel for the program, the microreactors will be owned and operated commercially. That’ll open up the industry to BWX Technologies (BWXT) and other nuclear players, which have seen major share rallies over the past year. Should all go to plan, small nuclear reactors may eventually be licensed to other sectors, like power-hungry data centers powering the artificial intelligence revolution.
Interesting program name.