27.02.2019 01:01 PM
Difficult choice of Fed

Speaking at the Senate Banking Committee, the head of the US Fed, Jerome Powell, said that the situation with the growth of public debt is unsustainable by definition and that the government will have to find ways to stabilize the ratio of government debt to economic growth.

Powell was also forced to admit that the United States should spend more and more on servicing the debt and the direct question of the probable bankruptcy of the social security system was forced to avoid a direct answer. In fact, the most obvious way to stabilize debt is to reduce costs, the lion's share of which consists of social programs.

He expressed his opinion, which, perhaps, coincides with the consensus opinion of the FOMC members to take a wait-and-see position on monetary policy. Inflationary pressure is moderate and allows for a pause as the labor market remains strong.

Actually, the markets do not expect the Fed to continue the policy tightening with more questions because of the program to reduce the balance. The Fed has completed the practice of reinvesting in US government securities but it does not have to violate financial sustainability.

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During the years of the QE, the Fed's obligations did not grow at all due to the creation of new money which was influenced by the higher excess reserves of commercial banks. This happened when the Fed began to pay commercial banks for keeping their reserves in its accounts since 2008. As a result, according to the schedule of liabilities, it is clearly seen that the growth of money in circulation was insignificant and increased along with the growth of the economy, as well as the lion's share of the growth of assets due to which securities were redeemed in the course of three waves of quantitative expansion. It fell on the funds of commercial banks, which went from the interbank lending market available to the Fed.

At the same time as the key rate increased by 0.25% since the start of the Fed normalization policy, it also increased the rate of excess reserves but only by 0.2% at each step. Thus, the gap between the rate of excess reserves and the yield of traditional instruments reduces. In January, this spread was eliminated, that is commercial banks no longer have any financial interest to continue to hold funds on the Fed's correspondent accounts. Accordingly, the Fed has all the opportunities to continue to reduce the balance not touching its own assets but only freeing up the excess funds of the commercial banks. In turn, Combanks can buy US public debt directly when it moves along the path laid down by the Banks of Japan in 2014.

Recall that the giant national debt of Japan is almost entirely concentrated within the country, government bonds are redeemed by the banking system without any hope of ever getting rid of their presence on its balance sheet. In fact, the banking system of Japan directly finances the country's budget and without this mechanism, Japan would have passed through a default long ago. Apparently, the US is moving in the same direction.

These factors directly or indirectly indicate the likely stage of a weakening dollar, which will be reflected in the stabilization of oil prices above $70 per barrel, as well as the rise in the price of gold and the yen, which the Bank of Japan is seriously preparing.

EUR / USD pair

In the eurozone today, indicators of consumer and business confidence for February will be published, the markets will look for the answer to the question of whether European economies have begun the recovery.

The dollar weakness supports the euro and the euro is expected to return above 1.14. There are no reasons to wait for a reversal amid a definitely bullish the short-term impulse.

GBP / USD pair

Theresa May made another attempt to convince the Parliament of Great Britain to accept her plan for Brexit. If the project is rejected, a second vote is scheduled for March 12. On the next day, there will be another vote on March 13 with the possibility of leaving the EU without a deal at all. If it is successful, there will be the last vote on March 14 on the possibility to request a postponement until June.

The pound has responded positively to May's new initiatives and remains the favorite to pair with the dollar. There was an update of the January maximum of 1.3210. The assault of resistance is expected at 1.3295 with the growth potential in the medium term up to 1.37.

Kuvat Raharjo,
الخبير التحليلي لدى شركة إنستافوركس
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