After ON RRPs go to zero, reserves will decline, further reducing the Fed’s interest expenses and losses. But it's not straightforward.
“Rates have been extremely low for a long time — it’s hard to know how many investors and companies are truly prepared for a higher rate environment.”
Suddenly lots of talk the 10-year yield will revisit 5%, which is funny just a few months after Rate-Cut Mania.
Quantitative Tightening has removed 37% of Treasury securities and 27% of MBS that pandemic QE had added.
The stock market didn’t like that at all.
Reserves, Domestic ON RRPs, Currency in Circulation, the TGA, and official foreign RRPs determine how far QT can go.
They learned a lesson from the mess in 2019, which Powell referred to several times.
Raises longer-run rate projection (higher for longer), and projections for inflation and GDP in 2024.
One-year yield rose to 5.05% today, highest since December 12.
Treasury QT will naturally slow in June 2025 when the Fed runs out of T-bills. Fed governors have teased us with interesting options.