Stock Rally As Powell Sparks A Buying Frenzy

The latest FOMC meeting caused a stock rally as Jerome Powell turned more “dovish” than expected. While Powell did note that progress on inflation has been lackluster, the announcement of the reversal of “Quantitative Tightening” (QT) excited the bulls.

"Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities”

Of course, the reversal of QT means a buyer of Treasury bonds is returning to the market, increasing overall market liquidity. It also means the Treasury will issue $105 billion less in gross in Q3. The bond market also got the memo, as the Fed’s return to the bond market suggests lower yields in the months ahead, easing financing pressure in the economy.

We have previously discussed the following chart of “liquidity,” which subtracts the Treasury General Account and Reverse Repo from the Federal Reserve’s balance sheet. The recent market decline coincided with a sharp drop in liquidity as the TGA account surged to almost $1 trillion from April tax receipts. Over the next few months, that liquidity in the TGA will get released into the economy. At the same time, the Federal Reserve will reduce its balance sheet runoff, which will further add to overall liquidity.