MyStratWeekly – March 4th 2025

Topic of the week: Hawkish Fed mindful of liquidity risks amid debt ceiling challenges

• The Federal Reserve maintained interest rates at 4.50% in January due to inflation concerns, while discussions at the FOMC meeting indicated a potential slowdown in quantitative tightening (QT) amid debt ceiling uncertainties;
• Despite a hawkish tone from Chair Jerome Powell, the Fed is considering adjusting the pace of QT to avoid adverse effects on economic activity and inflation resulting from fluctuations in bank reserves;
• The Fed's operational guidelines involve rolling over a portion of its Treasury securities and MBS, with significant maturities of nearly $400 billion due between April and August 2025, coinciding with potential debt ceiling issues;
• Upon a debt-ceiling deal, bank reserves could shrink fast as the Treasury replenishes its cash buffer leading to liquidity challenges in the financial system;
• Slowing QT could lead to a flatter yield curve, providing the Treasury with greater flexibility to manage federal debt. The Fed's future bond reinvestments may focus on shorter maturities to mitigate interest rate risk.

Market review: Is the U.S. Consumer on the Brink?

• United States: Consumer confidence erodes as spending plunges in January;
• Eurozone: Inflation is expected to retreat to 2.2% in February;
• Flight to safety: The 10-year Treasury note hovers near 4.25%;
• Risky assets: The credit market resists the Nasdaq's 7% decline this week.

Axel Botte’s podcast

• Review of the week – The United States’ tariff threat and massive trade deficit, inflation in the eurozone;
• Theme – The Fed's QT mentioned in the January FOMC meeting minutes.

Chart of the week

According to a survey conducted by the Conference Board, U.S. households' perceptions of the labor market have significantly deteriorated since Donald Trump took office.

More than 25% of households believe that job availability will decline over the next six months, marking the highest proportion since 2013 when the U.S. job market was still in a sluggish recovery following the Great Financial Crisis of 2008-2009.

The highly publicized layoffs from the Department of Government Enterprises (DOGE) resonate throughout the population, as a notable shift in unemployment claims is already being observed in the Washington, D.C. area.