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Reduction in Tightening Begins

Last week's Federal Reserve Policy statement and Chair Powell's discussion made it clear that tightening on all fronts seems to be over. This can be said as he mentioned that it is unlikely that the next rate move will be a hike. In addition to this from June onwards the pace of reduction in securities holding will decrease as the monthly redemption cap on Treasury securities is changed from $60 Bn to $25Bn. 

This is an important change as it puts a ceiling on the road ahead though exceptions exist at all times. During the discussion, it was also mentioned that any unexpected weakening in the labour market would result in the start of rate cuts. The non-farm payroll data on Friday indicated some level of weakening as the unemployment rate came at 3.9% with the lowest payroll number.

All these indications and comments resulted in the first rate cut to be factored in September compared to November previously. Even the US 10-year bond yield fell from 4.7% to 4.5% as the reduced ion in QT amount will ease US Treasury borrowing plans. 

The important question is whether equity markets remain at current levels or whether will there be a large fall as rate cuts require labour weakness. In addition to this Israel's operation in Rafah might complicate the rate path further as premium on oil and other basic products would push inflation higher. This makes the next few months crucial for all stakeholders.


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