A Great Disruption Is Coming To The Fed

Authored by Stephen Blitz, Chief US Economist at TS Lombard,

Treasury/Fed Merger Is Underway

The Fed cut and said “that’s all folks” until the data roll in, but that was no surprise and far less important than the signalling from the return of balance sheet purchases. Their cover story is that the TGA account swells in April, so they need to start buying bills now ($40bn in Jan, more in Feb). The press conference message from Powell is that they are buying because the Fed wants money market rates set by policy, not managed through open market operations (SRF these days). In truth, the return signals that the Fed is ensuring that Treasury spending will be financed without any rate hic-cups. The Fed will smooth out the volatility and keep rates tied to the funds rate. You can forget market signalling to the government that it is spending more than the market can absorb.