The FED on its knees

The markets had the Fed heeling yesterday. The change of tone of Chairman Powell announcement was in stark contrast to the central bank’s outlook just six weeks ago, when it was paving the way for further rate rises after pushing through a quarter-point rate increase. At the time the reaction of the markets to the sudden contraction in liquidity was immediate. Between this and President Trump's pressing, Mr Powell gave up to plan of imposing a firm foothold on the field, at least for now. This reminds me a lot of Greenspan times when FED's policy decisions often followed what markets expected. We all know what the result was, a progressive detachment of the market's valuations from the fundamentals.

Leaving aside the rate decision for a second and focusing on two aspects of yesterday's meeting. The FED is abandoning the forward guidance and gave more information on the future management of its balance sheet. The Chairman clarified its plans for the balance sheet (which was also a source of stress for the investors). It reassured the markets that a) there is an opening in using the balance sheet actively, and not just shrinking it and, b) it wanted to maintain it large. We expect/hope the FED will stabilise the contraction of the balance sheet at 3.5/3.75tr. This was further accommodating news. At least, for now, is Goldilocks again.

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