The Federal Reserve urgently downsizes! $7.2 trillion shrinks, will your wallet be affected?
Recent data show that the size of the Federal Reserve's balance sheet has shrunk by $16 billion since early July to about $7.205 trillion.
This adjustment not only reflects the Federal Reserve's flexible response in monetary policy, but may also trigger a chain reaction in the global financial market, affecting the asset allocation and market predictions of the majority of investors.
Analysts pointed out that the logic behind the Fed's balance sheet reduction this time is to follow the "short board principle", that is, to give priority to solving the structural shortage problems in the market rather than simply regulating the overall oversupply situation.
In a public speech, Dallas Fed President Rogers mentioned that considering the rapid decline in reverse repurchase agreements, it is necessary to appropriately adjust the parameters of balance sheet reduction to guide policy making.
In addition, Federal Reserve Chairman Powell also said that the future progress of balance sheet reduction will be discussed in depth at the March regular meeting.
Although there is currently an overall excess of liquidity in the U.S. money market, signs of structural shortages have already emerged.
The balance sheet normalization process depends on the relationship between depository institutions' reserve demand and supply.
Since reserves peaked in December 2021, the market has witnessed several fluctuations, and as of the end of January 2024, reserves have recovered to $3.5 trillion.
Based on past experience, the adequacy of reserves directly affects market interest rates and interbank lending behavior.
For example, research by the Federal Reserve Bank of New York shows that the amount of reserves has a significant impact on bank asset sensitivity: when it is less than 11%, the market shows a shortage, while when it is above 14%, it shows a surplus.
Accordingly, the reserve/GDP ratio is considered one of the key indicators for measuring market liquidity.
According to a report from the New York Fed, the Federal Reserve may adjust its balance sheet reduction strategy based on the reserve/GDP ratio.
Specifically, when this ratio drops to 10%, the pace of balance sheet reduction may be slowed down, and when it further drops to 9%, the balance sheet reduction may be suspended.
This fine-tuning of the strategy is intended to avoid excessive market tightening and ensure the smooth operation of financial markets.
Investors need to pay close attention to the upcoming Federal Reserve meeting in March, when specific adjustments to the balance sheet reduction parameters will provide clearer guidance to the market.
During this period, strategic adjustments to asset allocation cannot be ignored.
The bond market, stock market and currency market may all be affected, and timely adjustments are particularly important for those highly sensitive asset classes.
Although this series of actions by the Federal Reserve are based on a prudent assessment of the current economic situation, investors still need to remain vigilant about their far-reaching impact on global financial markets.
By deeply understanding the reasons behind these policy adjustments and the chain reactions they may cause, investors can better make strategic adjustments and seize future investment opportunities.
