Federal Reserve Chair Jerome Powell is expected to move to a new quantitative easing (QE), which may focus on the US Treasury bond market. This expectation follows a reported meeting between Powell and Treasury Secretary Scott Becent in early March.
In a blog post, Bitmex co-founder Arthur Hayes suggested that Powell is preparing to scale back the Fed’s current quantitative toning (QT) program. Hayes believes the Fed will support the Treasury market with new liquidity injections, and will likely start this summer.
Why is there a potential shift from QT to QE?
According to a central bank observer, Bescent noted to Powell during a meeting that future Federal Open Market Committee (FOMC) monetary policy decisions must match the Treasury’s key funding needs.
The March meeting reportedly increased the urgency that QE could resume to manage the ongoing federal deficit and absorb the large amount of new financial debt issuance needed to smoothly handle the substantial government debt rollbirds.
However, capital gains tax revenues remain a major source of funding for the federal government. These tax revenues rely heavily on rising stock market valuations to meet forecasts.
Related: This week’s FOMC Meeting: Powell’s all eyes, ciphers for rate tips and potential QT endings
How does trade policy affect financial strategy?
US President Donald Trump’s trade policy goals also play a role in the broader economic situation. His administration’s focus is on attempting to readjust the US’s massive checking deficit and encouraging a shift towards more domestic manufacturing activities.
Since his first term in 2016, President Trump has maintained the US trade deficit, particularly with China, as unsustainable for the country’s long-term health.
Historical economic contexts reinforce concerns about these long-term trade trajectories. China’s 1994 currency devaluation and subsequent entry into the World Trade Organization (WTO) in 2001 are often associated with decades of offshoring of subsequent significant US manufacturing capacity by economists.
As a result, as confirmed by official checking data, the result has been a deep, sustained trade deficit in the United States over the years. Trump’s proposed reversal of that long-term trend is likely to involve major domestic industrial policy support and substantial private investment.
Why does the Fed need to meet fiscal targets?
The independent monetary policy decisions of the Federal Reserve play a key role in fulfiling the potential or obstruction that enables or obstructs changes in these broader fiscal and trade policies pursued by the administration.
For example, constantly harsh financial conditions can slow overall economic growth and significantly weaken stock market performance.
Related: Hayes dismisses tariffs as noise and burns over $110,000 in Bitcoin with eyes given QE
Therefore, Powell’s potential policy adjustments for the new QE may indicate a perceived need for broader fiscal and monetary policy adjustments.
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