Fed to begin cutting rates in March, stop reducing bond portfolio at midyear

  • BofA Global’s rates team expects the Fed to start cutting rates in March
  • The Fed is also expected to stop shrinking its balance sheet at midyear
  • The Fed’s balance-sheet reduction should slow when overnight reverse repo balances fall to a low level
  • The benchmark 10-year Treasury yield has been trading below 4% in the new year
  • The BofA team expects 100 basis points of Fed rate cuts this year

Investors hyper-focused on expectations for rate cuts in 2024 can expect the Federal Reserve to buttress financial markets in another vital way, according to BofA Global’s rates team. BofA Global’s rates team, led by Mark Cabana, now expects the Fed to start cutting rates from a 22-year high in March, but also to unveil plans to stop shrinking its roughly $7.7 trillion balance sheet at midyear. The Fed in early 2020 restarted a crisis-era program allowing it to buy trillions of dollars in U.S. Treasurys and government-backed mortgage bonds to help contain fallout from the pandemic. A criticism of the program has been that can encourage excessive risk-taking in markets by juicing liquidity and suppressing yields, and can lead to asset bubbles that could threaten financial stability. Dallas Fed President Lorie Logan said during a Saturday speech in Dallas that “normalizing” the Fed’s balance sheet at a slower pace can help by “smoothing redistribution,” while also reducing the risk that it will stop “prematurely.” The Fed in recent years has been an anchor investor in both the roughly $26 trillion Treasury market and the $12 trillion agency mortgage-backed securities market. Importantly, Logan on Saturday said the Fed’s balance-sheet reduction should slow when overnight reverse repo balances fall to a low level. Cabana’s team thinks a $200 billion to $250 billion “low level” of the Fed’s overnight reverse repo facility could be reached in March. Demand for the program was under $700 billion on Friday, down from a pandemic peak of about $2.5 trillion parked overnight at the Fed. A shrinking overnight reverse repo facility points to excess liquidity being deployed into other assets. While stocks have had a tough start to 2024, the Dow Jones Industrial Average DJIA recently set a series of record closes and the S&P 500 index SPX ended Friday only about 2% below its record close, according to Dow Jones Market Data. The benchmark 10-year Treasury yield BX:TMUBMUSD10Y also has been trading below 4% in the new year, after jumping to 5% in October, sparking havoc in financial markets. The Fed began shrinking its balance sheet and raising interest rates in this cycle after inflation hit a peak of 9.1% in July of 2022. With inflation receding, but still above the Fed’s 2% target, investors will be focused on a new reading for December due on Thursday. To shrink its balance sheet, the Fed has been letting up to $60 billion in Treasurys and up to $35 billion in agency mortgage-backed securities mature and “roll off” its balance sheet each month, though high mortgage rates have meant the MBS monthly caps haven’t been met. The BofA team sees the Fed limiting Treasury roll off, starting in March, and ending it in July, but keeping the MBS program unchanged. The team also expects 100 basis points of Fed rate cuts this year, bringing the U.S. central bank’s short-term policy rate to 4%, with it falling to about 3% by early 2026. “BofA’s outlook for monetary policy also includes an end to QT at midyear,” the Cabana team wrote. The policy is known as “quantitative easing” when a central bank is buying bonds to expand its balance sheet and as “quantitative tightening” when its balance sheet is shrinking. It was first tapped in the wake of the 2007-2008 global financial crisis to quickly inject liquidity into markets.

Public Companies: BofA Global (N/A)
Private Companies:
Key People: Mark Cabana (Head of BofA Global’s rates team), Lorie Logan (Dallas Fed President)

Factuality Level: 7
Justification: The article provides information about the expectations of BofA Global’s rates team regarding the Federal Reserve’s plans to cut rates and stop shrinking its balance sheet. It also mentions the criticism of the crisis-era program and the potential risks it poses to financial stability. The article includes statements from Dallas Fed President Lorie Logan and provides some data on the overnight reverse repo facility. However, the article lacks additional sources or perspectives to support the claims made by BofA Global’s rates team.

Noise Level: 3
Justification: The article provides relevant information about the Federal Reserve’s plans to cut rates and stop shrinking its balance sheet. It also discusses the potential risks and benefits of these actions. However, there is some repetitive information and the article lacks in-depth analysis or actionable insights.

Financial Relevance: Yes
Financial Markets Impacted: The article discusses the Federal Reserve’s plans to cut rates and stop shrinking its balance sheet, which can have an impact on financial markets.

Presence of Extreme Event: No
Nature of Extreme Event: No
Impact Rating of the Extreme Event: No
Justification: The article primarily focuses on the Federal Reserve’s monetary policy and its potential impact on financial markets. There is no mention of any extreme events.

Reported publicly: www.marketwatch.com