Balance sheet change equals ease?
March 20, 2025
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–I was wrong about my SEP predictions yesterday. And wrong about how stocks would react if inflation estimates were raised. Powell said “a good part” of the increase in inflation estimates were due to tariffs. Here are the last three quarters of SEP:
(End-of-2025 estimates)
SEPT DEC MARCH
PCE Inflation 2.1 2.5% 2.7%
Core PCE Infl 2.1 2.5% 2.8%
Fed Funds 3.4 3.9% 3.9%
GDP 2.0 2.1% 1.7%
Fed estimates of inflation keep rising, while GDP is penciled in lower. What we have here is both STAG and FLATION. Again, I thought this scenario would be stock market negative, but the reduction in QT won the day. Treasury holdings on the Fed’s balance sheet will decrease by only $5 billion/month from $25b previously, while MBS (currently about 1/3rd of holdings) will continue to roll off at $35b per month.
–Powell said the reduction in QT has absolutely no bearing on policy, but if that’s the case, why did Waller dissent? The market cheered the net increase in liquidity, with stocks firmer going into tomorrow’s OpEx. The dots weren’t the focus. The balance sheet was.
–I had thought the Fed would move to three cuts this year rather than two, but the estimate for FF’s remained at 3.9% (range of 3.75-4.0% vs 4.25-4.5% now). Current Fed Effective is 4.33% so a cut of 50 would mean 3.83% or a price of 9617. SFRZ5 settled 9629.5, up 6.5 on the day. January 2026 FF settled 9632 or 3.68%, up 6 on the day. Not all that far from the dots, with just a bit more premium priced in for a potential shock that might force more Fed easing than planned. Peak contract remains SFRU6 at a price of 9649.5, up 8 on the day, essentially 3.5%.
–Post-Fed, Stephanie Pomboy was on Finance Unfiltered (Jim Iuorio and Bob Iaccino podcast) and she mentioned that not only had the Federal Gov’t ramped up spending and hiring, but that state and local gov’ts also greatly benefited from the fed’l fiscal gravy train, However, these governmental entities are bound by balanced budgets. She predicts a harsh retrenchment that hasn’t hit yet.
–I’m on the same page as Pomboy, or probably more negative on near-term growth. Uncertainty is filtering into data. Dining out numbers are down, delinquencies are up, confidence regarding jobs is sliding. My guess is that the Fed will be caught off-guard and have to ease sooner than later. At this particular moment, the market is leaning the same way: 2y yield fell 6 bps yesterday to 3.979% and tens fell only 2.1 to 4.258%. Several near SOFR calendars made new lows, for example, SFRM5/M6 one-yr fell 7 bps to -59.5 (9588, +1.0 & 9647.5, +8.0).
–Today’s news includes Jobless Claims expected 224k and Philly Fed expected 9.0 from 18.1 last.
Fed Summary
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20250319.pdf
“I was wrong”
