Sail GP Halifax: The Extreme Race Experience | SaltWire #racing #sailing #catamaran - The Fed is close to delivering a rare soft landing for the U.S. economy but it faces yet another fraught challenge: reducing cash in the financial system without disrupting markets.
Among the indicators the Fed is likely watching: bank reserves, some key interest rates in money markets and cash parked in the Fed's overnight reverse repurchase agreement facility, they said. He expects the Fed to announce tapering as early as May, reducing the cap on the amount of Treasuries it aims to offload every month by half to $30 billion. John Velis, Americas macro strategist at BNY Mellon, is of the same view on the size and timing of the taper.
While they appear abundant, banks' need for cash has increased. Cabana noted that reserves had increased to $3.5 trillion from $3.3 trillion when QT started in the summer of 2022. He ascribed that to lenders adding reserves in the wake of deposit outflows after the bank failures in March 2023 and to unrealized losses in their securities portfolios.
Views diverge on when that might completely drain and what it says about liquidity in the system. Velis expects it could go down to zero by the summer, while Cabana sees it not draining fully until the middle of next year. UBS strategists said it could rise in the second quarter at the expense of reserves.
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