If comments from Lael Brainard, a Fed Governor, a voting member and thus influential person on the FOMC are any indication, we’ll get the beginning of QT first (very likely in September) before the next rate hike which the recent inflation figures seem to be giving some of them cold feet. On the former she said “If the data continue to confirm a strong labor market and firming economic activity, I believe it would be appropriate soon to commence the gradual and predictable process of allowing the balance sheet to run off.” On the latter, “I will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target.” This comes just an hour after voting member Harker said “Let’s start the process of ceasing reinvestment. Let’s see how the market reacts to that, and then consider the third rate increase this year, whether that occurs or not.”
Bottom line, voting members of the Fed continue to believe that running off the balance sheet is somewhat harmless and no big deal. We hear that all the time and I’ll just reiterate my belief in taking the other side of that trade. No surprise at all to my readers. Whether its QT or a rate hike, it still is another form of tightening and the Fed is thus ramping up its pace of policy change in the 9th year of the expansion and in the context of a bull market that is making a run at the longest ever. We must also acknowledge that QT will be beginning just as the ECB is announcing its next taper.
For what’s to come, I’m glad Jamie Dimon finally agrees with what I’ve been saying forever.
The 2 yr note yield is at the low of the day in response to both comments, sitting at 1.37-1.38%. It was at or above 1.40% all of last week.