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Forward Guidance
Carolyn Sissoko & Joseph Wang on the Fed Pivot and “Too Big To Fail” In Private Equity & Leveraged Loans
Dec 25, 2023
01:27:42
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Carolyn Sissoko and Joseph Wang discuss the Fed's potential interest rate cuts in 2024, the collateral supply effect, and the merging of credit allocation facilities and money markets. They also touch on the rise of "Too Big To Fail," the separation of bank lending and money markets, central bank digital currencies, and the impact of the Fed's interest rate hikes on the financial system. Finally, they analyze the gamble in private equity and leveraged loans and discuss the outlook for stocks.
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Quick takeaways
- The Federal Reserve is reevaluating the traditional practice of moving interest rates and balance sheet policy in the same direction, allowing for more flexibility in normalizing both.
- Supply and demand are key factors in determining bond market outcomes, with the Federal Reserve's influence on bond prices being substantial.
Deep dives
Fed considers delinking interest rates from balance sheet policy
The Federal Reserve is reevaluating the traditional practice of moving the interest rates and balance sheet policy in the same direction. They believe that they can cut rates while shrinking the balance sheet, as these two tools are on independent tracks. This shift allows the Fed more flexibility in normalizing both interest rates and the balance sheet. While some may be concerned about the excess supply of bonds and the reduced capacity of the financial system to absorb this debt, it is important to consider the purpose of deficit spending and the potential returns on investment. Infrastructure investment, for example, can increase the economic value of a country and positively impact bond valuations. Additionally, concerns regarding balance sheet capacity mainly apply to short-term market management and the interplay between dealers and investors. Ultimately, the central bank's commitment to quantitative tightening indicates that their position is not that of a buyer in these markets.
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