A CICC research report stated that the basis for judging when the Fed will decide to slow down the balance sheet reduction is whether reserves are sufficient. Based on our calculations and Fed officials’ research on appropriate reserve levels, at the current rate of balance sheet reduction, financial flows in the third quarter of 2024 It may be a non-linear change from the current excess abundance (abundant reserves) to moderate abundance (ample reserves, which means the reserve ratio is close to 13%), and then to scarcity (scarcity).
Therefore, the Fed has reason to slow down before the third quarter, not only to prepare for a rainy day, but also to hedge against the pressure of long-term bond issuance starting in the first quarter.
In addition, the research report stated that the latest data showed that U.S. retail sales in December 2023 increased by 0.6% month-on-month, the strongest growth rate in three months. Looking forward, strong consumption will increase the resilience of the U.S. economy and reduce the possibility of recession. As the risk of recession decreases, the urgency of the Fed to cut interest rates will also decrease. CICC believes that the Fed may not cut interest rates in March as the market hopes, and the expectation of six interest rate cuts throughout the year may also be too radical. (Jinshi) #PEPEUSDT