Fed releases separate note on the balance sheet

Full statement:

The Federal Open Market Committee agreed that it is appropriate at this time to provide information regarding its planned approach for significantly reducing the size of the Federal Reserve’s balance sheet. All participants agreed on the following elements:

    • The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.
    • The Committee will determine the timing and pace of reducing the size of the Federal Reserve’s balance sheet so as to promote its maximum employment and price stability goals. The Committee expects that reducing the size of the Federal Reserve’s balance sheet will commence after the process of increasing the target range for the federal funds rate has begun.


    • The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).


    • Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.


    • In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.


  • The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.

The part on the predictable runoff was in the FOMC Minutes and it’s important. It will mean that if there are $200B running off in a month, the Fed will cap it at a certain level (some speculating it will be $100 billion or less). That would mean some variable level of reinvestment. The idea is that the runoff isn’t lumpy but the inevitable conclusion — unless they sell via QT — is that the pace will be slower than a natural runoff. None of that is a surprise.

The full statement from the January 2022 Fed Decision

Federal Reserve issues FOMC statement

For release at 2:00 p.m. EST

Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting.

Implementation Note issued January 26, 2022

Last Update: January 26, 2022

UK defense min: If Putin invades Ukraine he shouldn’t be rewarded via further gas income

  • If Putin chooses to invade Ukraine, he should not be rewarded by Europe funding him any further gas income

This is such any easy thing to say but when gas and electricty prices wreck Europe’s economy, that’s a tough trade off in the real world. It’s clear to me there’s a rift between the US/UK and Germany here with the Germans unwilling to cut off their gas supplies.

Weekly EIA US crude oil inventories +2377K vs -728K expected

  • Prior was +515K
  • Gasoline +1297K vs +2548K exp
  • Distillates -2798K vs -1260K exp
  • Refinery utilization -0.4% vs -0.4% exp

API data from late yesterday:

  • Crude -872K
  • Gasoline +2400K
  • Distillates -2200K

The four-week rise in US gasoline inventories is the largest since the start of the pandemic but the oil market doesn’t care. A report today from Energy Intel suggested that OPEC+ thinks the recent rise in crude is geopolitical and I have a hard time arguing against that.

Not much on the agenda in Europe today

The focus on the day will reside on the Fed, so it may be tough to see investors gather much conviction before we get to that.

As such, European trading today may be more of a quiet one featuring little significant market moves. There isn’t anything notable on the economic calendar to shake things up, so there isn’t much headlines to work with either.

For now, the risk mood is slightly calmer with US futures up a touch but that comes after the drop yesterday. Meanwhile, the dollar also saw gains trimmed in overnight trading and is keeping more mixed at the moment. That said, changes are light in FX and may likely keep that way until we get to the Fed.

0745 GMT – France January consumer confidence
0900 GMT – Switzerland January Credit Suisse investor sentiment
1200 GMT – US MBA mortgage applications w.e. 21 January

That’s all for the session ahead. I wish you all the best of days to come and good luck with your trading! Stay safe out there.

China’s onshore yuan reference rate to a near 4 year high, TWI even stronger

The ‘basket’ however, i.e. the CNY weighted against major trading partners, hit 103.5, which was its highest since August of 2015.

  • The basket contains the currencies of 13 of China’s major trading partners
  • It was set at a 100 base as of the end of December 2014
  • The China Foreign Exchange Trade System (CFETS, a unit of the PBOC) manages the basket

There has really be no let up in yuan appreciation despite official remarks about it stabilising. A stronger yuan will weigh on Chinese exports, but with the external sector is better shape than the domestic a higher currency gives the People’s Bank of

ICYMI – US warns of targetting sanctions personally against Putin if Ukraine invaded

AFP had the small snippet:

  • The United States warned Moscow of damaging sanctions, including measures personally targeting Vladimir Putin, as Russian combat troops massing around Ukraine launched new exercises.
  • “Yes. I would see that,” Biden said when asked by reporters in Washington about targeting Putin

It’d be great if this de-escalated tensions. We’ll see.

2 things to watch at the FOMC meeting

A snippet from Citi on the Federal Open Market Committee meeting:

  • “Two aspects of this Meeting will be closely watched:…
  • 1- We expect the Fed to complete its final phase of net asset purchases.
  • 2- Any signaling on the pace and size of rate increases, and the run-off of asset holdings.
  • We think the Fed will signal the beginning of the rate hiking cycle but otherwise remain vague about the pace and timing, and signal that it is likely to begin balance sheet run-off ‘later this year’. Even though we do not expect any precision, we expect the Fed to guide towards a gradual rate hike path. In line with the above, and Citi US economists’ view, we think that a 50bps hike is very unlikely in March,”
  • “The key hawkish risk to our view is for the Fed to end QE early, unless the Fed counterbalances an early end to QE with a clear desire to raise rates even more gradually,”
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