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Federal Reserve Monetary Policy Report: Plan to Stop Balance Sheet Reduction at Appropriate Time

2025.02.08 00:40:24

February 8th. The Federal Reserve issued its semiannual monetary policy report. It was mentioned in the report that the Fed is continuously and significantly reducing its holdings of U.S. Treasury securities and agency securities in a predictable manner. Since June 2024, the Fed has decreased its holdings of securities by $297 billion, and the total holdings of securities have declined by approximately $2 trillion since the start of the balance sheet reduction. The Federal Open Market Committee (FOMC) expressed its intention to maintain the level of securities holdings at a level that is consistent with the efficient implementation of monetary policy under the ample-reserve regime. In order to ensure a smooth transition, the FOMC slowed down the pace of securities holdings reduction in June 2024 and intends to stop reducing holdings when the reserve balance is slightly above the level that it deems to be consistent with ample reserves. Driven by a strong labor market and rising real wages, consumer spending has been continuously growing vigorously. Meanwhile, real business fixed investment has increased moderately. In the housing market, new home construction has been strong, but existing home sales remain sluggish as mortgage rates remain high. Unlike the GDP situation, manufacturing output has remained relatively stable. This is partly due to the softness in production in interest rate-sensitive industries. The U.S. financial system remains sound and resilient. Valuations in various markets, such as stocks, corporate debt, and residential real estate, are still relatively high compared to fundamentals. The ratio of total household and nonfinancial business debt to Gross Domestic Product (GDP) continues to decline and is currently at historically low levels compared to the past two decades. The capital levels reported by most banks are still well above regulatory requirements. Although the reliance on uninsured deposits has decreased, some banks still face significant fair value losses on fixed-rate assets. Regarding funding risks, although the 2023-2024 Securities and Exchange Commission reforms to money market funds (MMFs) have partially alleviated the vulnerability of major MMFs, other lightly regulated short-term investment instruments still remain susceptible to shocks and lack transparency. At the same time, the asset size of these instruments continues to grow. Meanwhile, hedge funds seem to have high and concentrated leverage ratios. (Jinse)
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