When Might the Fed End its Quantitative Tightening (QT) Program?

Economic

Summary:

The most notable growth in liabilities under COVID-era quantitative easing (QE) were bank reserves (+$2trn) and the reverse repo facility (RRP) (+$2.3trn).

Former Federal Reserve (Fed) Chair Janet Yellen described the first episode of balance sheet drawdown from 2017-2019 to be “like watching paint dry”. This was largely the case until a spike in the overnight reverse repo rate1 in September 2019 by more than 3% above the Federal Reserve’s target range at the time, forced the Fed to intervene and cut administered rates2 and end quantitative tightening (QT).

Since May 2022, the Fed has reduced its balance sheet by almost $2 trillion3, and it’s similarly been “like watching paint dry.” However, the Fed and market participants are sensitive to avoid another liquidity scare. As such, investors are curious; what might lead the Fed to end its current QT program and how soon?

To answer this, it’s useful to assess the liability side of the Fed’s balance sheet to understand where the fresh digitally printed money ends up after buying a U.S. Treasury security. The most notable growth in liabilities under COVID-era quantitative easing (QE) were bank reserves (+$2trn) and the reverse repo facility (RRP) (+$2.3trn). Under the Fed’s current QT program, declines in the RRP have accounted for most of the “money drain” from the system4.

The RRP is perceived as a measure of “excess’ liquidity meaning there are more dollars in short term vehicles—primarily money market funds—than there are supply of Treasury bills in the open market, and thus Treasury collateral is provided at the Fed via the RRP. However, as the Fed’s balance sheet continues to shrink, the RRP is well on its way to zero. Given this, a continuation of QT could last another three months without hiccup; thereafter, most of the decline in liquidity is likely to be seen in falling bank reserves.

At the beginning of 2019, Fed Governor Waller noted that bank reserves of roughly 10-11% of GDP might be sufficient. Bank reserves as a % of GDP are currently at these levels, suggesting the Fed is poised to end QT sometime in 1H2025 once RRP drainage is complete. Should the level of reserves fall below this threshold, however, its likely to lead to volatility in short term rates. Simply put, when there is enough short-term money/liquidity in the system, short term rates tend to be well behaved; when there isn’t, overnight rates are at risk of spiking.

For investors, the Fed is committed to maintaining an ample reserves regime because it promotes market stability and allows the committee the flexibility to react. Moreover, the balance sheet has increasingly been viewed by Fed members as somewhat independent to the direction of monetary policy. Currently the Fed is cutting rates while continuing QT, so hypothetically they could hike rates with QE if they needed to address market functioning and inflation at the same time. Importantly, regardless of the direction policy needs to go next year, they can only be successful if the market is functioning as intended. Hence, they should learn from their mistakes in 2019 and consider ending QT a bit earlier especially given fiscal policy uncertainty next year.

When bank reserves fall below 10-11% of GDP, liquidity is scarce and cause volatility in short term rates

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Warren Takunda

Economic

Asian shares rose on Friday while the yen was aiming for its best week in four months as strong inflation data from Tokyo had traders favouring an imminent rate hike from the Bank of Japan.

Overnight, trading in U.S. equities and Treasuries was closed due to the Thanksgiving holiday, leaving little lead for Asia. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4%, helped by a 2% jump in Chinese blue chips. For the week, Asian stocks were flat.

Japan's Nikkei dropped 0.3% as the yen surged after Tokyo's inflation data, taking losses for the index in November to over 2%, its weakest monthly performance since April.

Data showed core consumer prices in Japan's capital accelerated in November and stayed above the central bank's 2% target in a sign of broadening price pressure.

The dollar was nearly 1% lower at 150.14 yen , having touched 149.77, its lowest level since Oct. 21. For the week, dollar is down 3% against yen, the biggest drop since late July.

Traders now see a 60% chance that the BOJ could hike interest rates again in December, having been undecided before the data. A strengthening economy and concerns over the depreciating yen have recently added to the urgency for the BOJ to act.

"We note that the acceleration in inflation, combined with the solid recovery in monthly activity, increases the odds of another BoJ rate hike in December," said analysts at ING in a note.

French bonds and stocks are steadier today, but is this just the calm before the storm?

"With the U.S. closed for Thanksgiving yesterday, and many market participants likely extending the holiday to the weekend, there isn't too much action in financial markets to talk about."

Wall Street futures , rose 0.5% in Asia, while Europe is looking ahead to a mixed open, with EUROSTOXX 50 futures down 0.1% and FTSE futures rising 0.11%.

Treasury yields eased as the cash market reopened in Japan. Ten-year yields fell 2 basis points (bps) to 4.240%, the lowest in a month, and were down 17 bps for the week, the biggest since early September.

The dollar is down 1.5% against its major peers this week as markets rekindled hopes for a U.S. rate cut in December. Futures narrowed the odds of a quarter-point rate cut from the Federal Reserve in December to 63%, from 55% a week ago, according to CME Group's Fed Watch Tool.

Most of the action overnight was in Europe, where French bond yields edged lower, a welcome bit of respite for France's government, which saw its borrowing costs rise to their highest over Germany's since 2012 on Wednesday.

French Prime Minister Michel Barnier on Thursday dropped plans to raise electricity taxes in his 2025 budget, bowing to far-right threats to bring the government down unless he eased the burden on the working classes.

German inflation missed forecasts in November, suggesting some downside risk for the eurozone inflation reading due later in the day.

Traders are still leaning towards a 25-bps rate cut from the European Central Bank in December, after a board member Isabel Schnabel said it should only cut rates gradually.

Oil prices were up on Friday but looked set for weekly losses on the Israel-Hezbollah ceasefire deal in Lebanon. U.S. West Texas Intermediate crude futures rose 0.6% to $69.12 a barrel, but were down 2.9% for the week.

Gold was last 0.8% higher at $2,662.36 per ounce on the weak dollar, but was on course for a 3% decline for the month, its steepest drop in over a year.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

ING

Economic

GDP growth in the third quarter came in at 2.1% on a year-on-year basis, below the market consensus (2.6%) and our call (2.4%), and driven by gross fixed capital formation. TurkStat, on the other hand, revised second-quarter GDP expansion down to 2.4% from 2.5%. Accordingly, nine-month GDP growth stood at 3.2%.

On a seasonally adjusted basis, following TurkStat’s downward revision for the second quarter, the sequential growth in this period turned to negative -0.2% quarter-on-quarter. Third-quarter GDP, on the other hand, recorded a negative QoQ growth rate of -0.2%. This shows further weakness as Turkey is now in a technical recession. Its feeble sequential performance is attributable to government consumption turning negative as well as further weakness in private spending and a negative contribution from inventories.

Quarterly Growth (%, YoY)

Source: TurkStat, ING

When we look at the breakdown on expenditures in the third quarter and compare them with the same period of 2023:

Private consumption has remained sluggish with a 3.1% YoY rise (lifting the headline GDP by 2.2ppt), given that the expansion was 7.0% YoY in the first quarter and 1.5% YoY in the second quarter.

Investment appetite weakened from 9% YoY in the first quarter to 0.8% YoY in the second quarter, turning negative with -0.8% YoY growth. This translates into a -0.1ppt contribution to the GDP expansion and was mainly driven by a continuing contraction in machinery equipment (8.6% YoY) after diving into negative territory in the second quarter. However, construction investments have remained robust with strong 9.4% YoY growth following 8.4% YoY a quarter ago.

Public consumption, which has positively contributed to the headline GDP in recent years, has been losing steam in the last two quarters and fell by a -0.9% YoY, dragging third-quarter growth down by -0.1ppt. This reflects that expenditure and revenue-side measures taken after local election in fiscal policy have created impact.

Inventory build-up shaved 2.0ppt off growth.

Finally, net exports continued to support the headline growth with a 2.2ppt contribution. This is mainly attributable to a contraction in imports.

In the sector breakdown, construction turned out to be the biggest contributor (0.5ppt), followed by agriculture (0.4ppt). Further deceleration in the services sector and declining contribution to the headline GDP in recent quarters also attracted attention.

Drivers of the growth (ppt contribution)

Source: TurkStat, ING

We expect Turkey's economic activity to remain soft in the last quarter, given tighter financial conditions leading to ongoing normalisation in domestic demand – although some recent indicators, such as capacity utilisation, real sector confidence, retail and construction sector indices, showed a recovery in November. The Central Bank of Turkey's recent communication suggested that we are nearing a gradual rate-cutting cycle, implying a December move as a real possibility. We see a tight monetary stance prevailing in the period ahead and forecast GDP growth this year at 2.8%.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

The Pound to Euro exchange rate is testing the upper end of the September-November range at 1.2030, and the Pound to Dollar exchange rate has rallied to 1.2743 amidst a broadening pullback in the broader USD.

Gains for the UK currency come amidst a low volatility external backdrop that favours 'carry currencies' such as the Pound.

Volatility and liquidity have been particularly low this week. The U.S. market was off on Thursday and is unlikely to offer much today, given that markets there will only open for half a day on Friday.

The low volatility environment means the Pound can benefit from the UK's high interest rates in a trade known as the carry trade.

"Sterling is a carry currency," says James Nelligan, an analyst at JP Morgan. "Going forward, overall, it should be driven more by its yield advantage (carry) or lack thereof."

The Pound's carry advantage (or yield advantage) stems from the Bank of England's gradualist approach to cutting interest rates which leaves UK rates higher than elsewhere, particularly the Eurozone.

Pound Sterling "Carried" Higher against Euro & Dollar_1

Above: GBP/EUR rises into resistance.

"The Pound is rising amidst a low volatility FX backdrop," says Luke Eales at SendAbroad.co.uk.

The Bank of England is expected to keep interest rates unchanged in December, whereas the European Central Bank is expected to cut rates again.

"We expect an unchanged decision in line with consensus and markets," says Kristoffer Kjær Lomholt, FX strategist at Danske Bank. "We expect the BoE to opt for a more gradual cutting cycle and deliver its next cut in February, a key argument for our bullish GBP view."

Investment bank consensus forecasts update: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/EUR.

The U.S. Federal Reserve is also expected to cut interest rates in December, leaving the Bank of England the only central bank in the trio to keep rates unchanged, burnishing Sterling's interest rate yield advantage further.

The Dollar is meanwhile staging a retreat as it corrects from overbought conditions that built up in an impressive November rally, which tends to benefit currencies that outperform in calm market conditions.

"On a broader scale, the USD rally has paused over the past week, with the broad USD on track for its first weekly decline in two months. We expect this trend to persist through year-end," says Lomholt.

Pound Sterling "Carried" Higher against Euro & Dollar_2

Above: GBP/USD rises amidst a broader pullback in the USD.

Looking to 2025, analysts at JP Morgan think the Pound will "muddle" through, gaining ground against the Euro but losing to the Dollar.

"There are two-sided risks for Sterling in 2025, and so we think the material outperformance seen over the past few years probably won’t be repeated," says Nelligan. "Sterling should outperform euro but underperform the dollar due in part to relative tariff risk considerations."

He says the Pound should still outperform other G10 low yielders, in part due to the still solid outlook for the UK labour market, which cuts off the left tail for rate spreads.

"Overall, risks to Sterling from weaker UK growth and BoE easing are offset by relative insulation from tariff risks and still high yield, meaning Sterling likely muddles through, delivering lower returns than recent years," says Nelligan.

JP Morgan forecasts show EUR/GBP should bottom at 0.81 in the second quarter of 2025 before the Euro stages a comeback to end the year at 0.82. (This gives a GBP/EUR high at 1.23 before falling back to 1.22).

The bank's GBP/USD forecast anticipates a low of 1.21 in the first quarter of 2025 ahead of a recovery to 1.32 by year-end.

Source: Poundsterlinglive

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Justin

Economic

Forex

The AUD/USD pair trims a part of intraday gains to a multi-day top and trades just above the 0.6500 psychological mark during the first half of the European session on Friday, up for the third consecutive day.

The US Dollar (USD) struggles to capitalize on Thursday's modest gains and touches a fresh two-week low amid bets for another 25 basis points interest rate cut by the Federal Reserve (Fed) in December. This is seen as a key factor lending support to the AUD/USD pair, though bulls seem reluctant amid worries that US President-elect Donald Trump's tariff plans could trigger a US-China trade war.

Meanwhile, the US Personal Consumption Expenditure (PCE) Price Index released on Wednesday showed that the progress in lowering inflation stalled in October. This comes on top of the growing market conviction that Trump's expansionary policies will boost inflation, which should restrict the Fed from easing its policy further. This helps limit the USD losses and caps the AUD/USD pair.

Apart from this, persistent geopolitical tensions stemming from the protracted Russia-Ukraine war warrant some caution before placing aggressive bullish bets around the risk-sensitive Aussie. In the absence of any relevant market-moving economic data from the US on Friday, the AUD/USD pair remains at the mercy of the USD price dynamics and seems poised to end the week on a flattish note.

That said, the official Chinese PMIs, due for release over the weekend, will play a key role in influencing sentiment surrounding the China-proxy Australian Dollar (AUD). The focus will then shift to important US macro data scheduled at the beginning of a new month, including the closely watched Nonfarm Payrolls (NFP) report, and the third quarter Australian GDP growth figures next week.

NBS Manufacturing PMI

The NBS Manufacturing Purchasing Managers Index (PMI), released by the China Federation of Logistics & Purchasing (CFLP) and China’s National Bureau of Statistics (NBS), is a leading indicator gauging business activity in China’s manufacturing sector. The data is derived from surveys of senior executives at manufacturing companies. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the Renminbi (CNY). Meanwhile, a reading below 50 signals that activity among goods producers is generally declining, which is seen as bearish for CNY.

Source: FXSTREET

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

FOREX.com

Economic

Forex

Tracking Japan's economic developments, the rise in Tokyo CPI above the 2% benchmark raises expectations for yen-supportive policies from the BOJ. However, the market sentiment towards the Fed rate expectations is set to take the lead next week with leading US economic growth indicators, the US ISM Manufacturing and Services PMI, insights from Fed Powell on Wednesday, and Non-Farm Payrolls on Friday.

These data points will shape Fed rate expectations ahead of the Dec. 18th FOMC meeting and the BOJ decision on Dec. 19th, keeping traders on edge before the holiday season.

Technical Analysis: Quantifying Uncertainties

USDJPY Forecast: 3-Day Time Frame - Log Scale

As the US Dollar pulled back from the 107-mark, USDJPY retreated slightly below 157, dipping back into its lower channel. The pair now faces key support zones at 148.80 and 146.80, aligning with the mid-channel boundary and the 0.618 Fibonacci retracement of the September-November uptrend.

The Relative Strength Index (RSI) remains below the neutral 50 level, continuing its downward trajectory after reversing from negative divergence and overbought conditions on the 3Day time frame, signaling room for further declines.

If USDJPY rebounds from the recent 149.50 low, the 154 level emerges as a potential resistance zone, aligning with the upper channel boundary. A break above this level could pave the way for further advances towards 157 and 160, increasing risks for the Yen and a BOJ intervention.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Stocks

London stocks were steady in early trade on Friday as investors mulled disappointing retail sales figures and looked ahead to a slew of UK data releases.

At 0840 GMT, the FTSE 100 was flat at 8,280.92.

Derren Nathan, head of equity research at Hargreaves Lansdown, said: "The FTSE has held onto modest gains earned earlier this week, with few cues to take from global markets after the US took a breather to gather for Thanksgiving.

"Retail stocks will be on traders’ minds today as shoppers trawl the aisles and their screens for Black Friday bargains."

Industry data out earlier showed that retail footfall tumbled in November, hit by stormy weather, weak consumer confidence and tough comparatives.

The latest Sensormatic footfall monitor from the British Retail Consortium showed total UK footfall fell 4.5% in November year-on-year.

Within that, high street footfall slid 3.7%, in retail parks it fell 1.1% - a notable reversal of October’s 4.8% uplift - and in shopping centres there was a 6.1% slump.

Helen Dickinson, chief executive of the BRC, called the fall "disappointing".

She continued: "A later-than-usual Black Friday and low consumer confidence meant customers were hesitant to hit the shops. Some northern cities also suffered particularly badly due to Storm Bert, which caused travel disruption towards the end of the month."

The data covers the four weeks to 23 November, but the discount-heavy Black Friday falls on 29 November this year.

Dickinson continued: "Retailers remain hopeful that the Black Friday and Christmas sales will help to turn around the declining footfall seen through most of 2024."

Andy Sumpter, EMEA retail consultant for Sensormatic, said: "Consumer confidence remains volatile, perhaps not helped by post-Budget spending jitters and shoppers withholding festive purchases, opting instead to shop around for the best prices or hold out for further discounting.

"This lacklustre footfall will have come as a blow for many retailers, who would have been counting of getting early Christmas trading results under their belts before the start of advent.

"However, these figures do not include Black Friday and the Saturday of the Black Friday weekend - tipped as one of the busiest days for store shopping during peak trading - which will hopefully jump start seasonal shopping.

"Now all eyes turn to December, where retailers hope to make up for lost ground and turn around their festive fortunes."

Still to come, net lending, consumer credit and mortgage approvals data for October are all due at 0930 GMT.

In equity markets, broker notes were having an impact, with Anglo American the top gainer after an upgrade to ‘buy’ from ‘hold’ at Jefferies, which upped its price target to 2,850p from 2,500p.

IMI also rose sharply after an upgrade to ‘buy’ at Bank of America Merrill Lynch.

Spire Healthcare surged to the top of the FTSE 250 as a report in the Economic Times suggested that India’s Narayana Health is in talks with the company’s shareholders about buying a controlling stake.

Citing people familiar with the matter, the Economic Times said Narayana plans to buy at least 51% of Spire via an open offer, but if Narayana manages to acquire around 75%, it may consider taking the company private.

TI Fluid Systems was in the black after it agreed to be bought by Canadian automotive parts maker ABC Technologies for £1.03bn. ABC, backed by private equity fund Apollo, said it would pay 200p a share in cash after having previous offers rejected. TI Fluid shares closed 5.7% higher at 189.2p on Thursday.

On the downside, defence firm BAE Systems slumped on the back of a downgrade to ‘underperform’ at Bank of America Merrill Lynch.

Source: Sharecast

Risk Warnings and Disclaimers

Add to Favorites

Daily News

Remarks of Officials

Central Bank

Forex

FastBull Events

FastBull Featured

Devin

Mohammad Omar

Recent Searches

Top Searches

Markets

News

Analysis

User

24/7

Economic Calendar

Education

Data

When Might the Fed End its Quantitative Tightening (QT) Program?

When bank reserves fall below 10-11% of GDP, liquidity is scarce and cause volatility in short term rates

Asian Shares Rise, Yen Aims for Best Week in 4 Months on BOJ Hike Bets

Source: Reuters

Turkish GDP Growth Sees Further Deceleration In Third Quarter

Quarterly Growth (%, YoY)

Source: TurkStat, ING

Drivers of the growth (ppt contribution)

Source: TurkStat, ING

Pound Sterling "Carried" Higher against Euro & Dollar

Above: GBP/EUR rises into resistance.

Above: GBP/USD rises amidst a broader pullback in the USD.

Source: Poundsterlinglive

Aud/usd Holds Steady Above 0.6500, Lacks Bullish Conviction Amid Trade War Fears

NBS Manufacturing PMI

Source: FXSTREET

USDJPY Forecast: Yen Strengthens Ahead of NFP Week

Technical Analysis: Quantifying Uncertainties

London Open: Stocks Steady Ahead of Data Slew; Spire Healthcare Jumps

Source: Sharecast

Risk Disclosure