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Wednesday’s Federal Reserve policy decision was pretty dull for investors — officials kept interest rates the same as they have been since July 2023.
But some savvy traders are excited about another important decision. The Fed announced that it will reduce significantly its quantitative tightening (QT) program — it’s sold out of its assets to reduce the money supply and increase interest rates – starting in June.
US Treasury yields fell on the news. The interest rates on the 10-year and the 2-year both fell by 0.05 percentage points.
What happens: The Fed bought a slew of government-backed bonds between 2020 and 2022 to help support economic recovery after the pandemic-induced recession. These purchases ended up pushing interest rates down in certain parts of the economy, like home and car sales.
In mid-2022, when inflation rose higher, the Fed reversed it and began unloading those bonds.
The Fed currently lets up to $60 billion in Treasuries mature each month without replacing them, reducing the amount of money circulating in the economy. The idea is that QT can help put some downward pressure on prices.
But there are also some downsides to the practice – changing the amount of liquidity in the economy and redirecting that money can have some big consequences.
As JPMorgan Chase CEO Jamie Dimon pointed out in his annual letter to shareholders last month, “we’ve never really experienced the full impact of quantitative easing on this scale.” The current QT pace drains more than $900 billion in liquidity from the system annually, he said, adding, “I’m more concerned (about it) than most people.”
QT reduces the amount of money in the banking system, leading to higher interest rates and tighter monetary conditions, but the last time the Fed implemented such a program in 2019, some banks failed much lack of reserves.
This led to a “repo crisis”, in which interest rates for overnight loans between banks rose unusually high. The Fed had to step in and provide liquidity to bring those repo rates down.
Fed Chairman Jerome Powell does not want a repeat of 2019 and said at his last press conference that the QT would be reduced soon.
On Wednesday, officials announced they will cut the rate on QT to $25 billion, more than half of where it is currently.
What it means: “May 1 is set to be a big day for the bond market,” Evercore ISI’s Krishna Guha and Marco Casiraghi wrote in a recent note.
If the Fed eases its tightening policy, “financial markets will likely see the cut-off of the QT program as bullish for riskier investments like stocks and bonds on the margin,” Bill Adams, chief economist for Comerica Bank, wrote in a note on Tuesday.
This is because a tapering would send bond prices higher and interest rates lower.
The risk, Bank of America analysts wrote Tuesday, “is skewed to the upside for stocks, in our view, especially given a potential QT cut announcement.”
The Biden administration moved Tuesday to reclassify marijuana as a lower-risk drug, a person familiar with the plans told CNN, a historic move that recognizes the medical benefits of the long-criminalized drug and has broad implications for cannabis-related research and the industry as a whole.
The US Department of Justice recommended that marijuana be reclassified as a Schedule III controlled substance, a classification shared by prescription drugs such as ketamine and Tylenol with codeine.
“Today (Attorney General Merrick Garland) circulated a proposal to reclassify marijuana from Schedule I to Schedule III,” Xochitl Hinojosa, the DOJ’s director of public affairs, said in a statement. “Once published by the Federal Register, it will initiate a formal rulemaking process as prescribed by Congress in the Controlled Substances Act.”
The formal rulemaking process is lengthy, typically includes a public comment period, and can take months to complete.
The redistricting recommendation, first reported Tuesday by the Associated Press, was hailed by lawmakers on both sides of the aisle, including Republican Rep. Nancy Mace of South Carolina, who proclaimed it on X as “big news for business, tax credits and research barriers.”
Democratic Representative Earl Blumenauer of Oregon said in a statement that rescheduling is “one step closer to ending the failed war on drugs.”
Read more here.
Changpeng Zhao, the founder of the world’s leading cryptocurrency exchange, was sentenced to four months in prison on Tuesday after pleading guilty to money laundering charges last year, my colleague Allison Morrow reports.
The verdict, delivered a US federal court in Seattle, is far lighter than the three years prosecutors had argued for.
Ahead of the sentencing on Tuesday, Zhao, who goes by CZ, apologized for mistakes he made as CEO of Binance, the crypto exchange he founded in 2017.
“Words cannot explain how deeply I regret the choices that resulted in me being on trial,” he said in a letter to the judge. “Be assured it will never happen again.”
Binance agreed to pay more than $4 billion in fines and other penalties as part of a coordinated settlement with the federal government last fall. The company admitted to engaging in anti-money laundering, unlicensed money transfer and sanctions violations.
Zhao, who is 47 and has a personal fortune of nearly $40 billion, agreed to step down as CEO and pay $200 million in fines, according to Bloomberg.
