A few days back the 10-year yield entered a “death cross,” a dreaded technical indicator. Is this the beginning of a bigger slide in rates?
Jerome Powell spoke on Friday afternoon on a variety of topics, including where he stands on reducing the Fed’s balance sheet. Randall Forsyth of Barron’s Financial wrote:
Last Friday, however, Powell indicated the pace of the balance-sheet shrinkage might be adjusted as circumstances dictated, which was a less-recognized factor in the stock market’s strong rally since then. Powell also indicated the Fed would be “patient” in raising short-term interest rates, a point he reiterated Thursday, which has also helped power the rebound in risk assets.
The latest FOMC minutes shed light on the committee’s thinking on the composition of its assets, which should be of more relevance to financial markets. In particular, the Fed would prefer to return its portfolio to plain-vanilla Treasuries and get away from its Ginnie Mae, Fannie Mae and Freddie Mac MBS.
The Fed Chairman can be seen here discussing the position of the Federal Reserve on the reduction of its balance sheet. Could be that the Fed will begin to use this as a subtle tool for interest rate control by simply opting to not buy mortgage backed securities moving forward.
What’s this all mean for rates? Too soon to tell but whatever is decided, last month’s FOMC minutes and chairman Powell’s discussion with David Rubenstein last Friday afternoon makes it very clear that the Federal Funds Rate is but one tool in their bag of tricks to keep the economy on track.