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Is the Fed runoff story more about the signals than the facts?

Tough to explain the US dollar weakness today

The Wall Street Journal reported today that the Fed may keep a larger balance sheet than previously believed.

This was framed as a technical decision with officials at the Fed arguing that shrinking the balance sheet is unnecessary to pin short term rates.

“The Fed’s decision about the size of its portfolio is being driven by a
technical debate inside the central bank about reserves in the banking
system, not over whether officials want to provide more or less stimulus
to the economy,” the report says.

Maybe that’s the truth but the timing is suspect. A year ago Powell was talking about a four-year runoff and after some market turmoil the tune has changed.

A big part of the US dollar slump today could be more about this story. It’s a signal that the Fed is proactively easing.

The counterpoint is that if that were the case you would see a rally in bonds rather than the modest selloff we’re seeing.

ForexLive

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