The Federal Reserve has raised concerns about the risk of slowing economic growth, but it maintains that this risk remains low at the moment. Fed Chair Jerome Powell emphasized that the central bank could afford to be patient with its policy decisions, given its assessment that the economy is still in a good place. This cautious approach reflects the Fed’s confidence in the current economic conditions, despite potential challenges on the horizon.
Vincent Reinhart, a former Fed economist and now chief economist at BNY Investments, has warned that the central bank’s policy choices are likely to become more difficult. He believes that inflation risks, particularly those stemming from tariffs, could be more significant than the Fed currently anticipates. This perspective highlights the complexity of the economic landscape and the potential for unexpected developments that could impact inflation and growth.
In a recent announcement, the Fed stated that it would slow the reduction of its approximately $6.8 trillion balance sheet. This decision aims to avoid exacerbating disruptions in funding markets, which could arise from the ongoing standoff over the debt ceiling. The debt ceiling limits the amount of money the government can borrow to meet its financial obligations, and the current impasse has created uncertainty in the markets.
To mitigate potential disruptions, the Fed will now cap the amount of Treasury securities it allows to roll off its balance sheet at $5 billion per month, down from $25 billion. The monthly cap for mortgage-backed securities remains unchanged. This adjustment is intended to provide stability in the financial markets while the debt ceiling issue is resolved. However, not all Fed officials agreed with this decision; Fed Governor Christopher Waller voted against it.
The broader economic outlook remains cautious, as indicated by various market indicators. According to Stipelis, the trend in the US Dollar is still bearish, and the Stipelis Metals Indicator is at an all-time high. Additionally, the 10-year- 3-month yield spread remains negative, signaling potential concerns about future economic growth. These indicators suggest a cautious outlook for the economy and equity markets.
Here are some key market indices and their year-to-date changes:
- Metals: +15.19%
- Foreign Exchange (FX): +4.13%
- Bonds: +1.56%
- Yield Index: -0.45%
- Equity: -3.01%
- Energy: -4.86%
- Dollar Index: -4.80%
- Commodity Index: -16.20%
- Agricultural: -21.65%
These figures reflect the mixed performance across different sectors, with some areas showing positive growth while others face declines. The negative performance in the equity, energy, and agricultural sectors underscores the challenges facing the economy.
In summary, while the Fed acknowledges the risk of slowing growth, it believes that the economy is still in a good position.
The central bank’s cautious approach to policy decisions and balance sheet reduction aims to maintain stability in the face of potential disruptions.
However, the economic outlook remains uncertain, with various indicators suggesting a cautious stance on future growth and market performance.
Stephen Coleman 3-20-2025
Commodity Trading Advisor