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Tightening to loosen before Rate Cut ?

In the past couple of weeks, the FOMC members have been talking about the speed of balance sheet reduction. They have also tried to emphasise it not being an indicator of a rate cut confirmed. If history is of use then there have been at least two instances in recent times when the speed was changed without official policy change. First was the Operational twist in 2011-12 and second was purchases in 2018-19 before official QE.


The current discussions hint that there might be a period where the sales quantum is reduced to ease some forthcoming liquidity squeeze. The leading reason might be the reverse repo levels at $440Bn as of yesterday compared to $1018 at the end of December 2023.


Another reason might be that almost $2 trillion of US government debt is due to maturity and would need refinancing. This would mean a large squeeze by September 2024 which is the fiscal year end. Whether it is raised in short tenure or long tenure would be important as it would indicate how the Treasury sees the interest rate going ahead.


These are factors that would influence the FOMC decision on reducing the quantitative tightening to happen in June or before. But this might also mean that the timeline of rate cuts might shift unless markets and the economy crash suddenly.

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