The Fed announced big changes today. And no, we’re not talking about interest rates

The Fed announced big changes today. And no, we’re not talking about interest rates

Wednesday’s Federal Reserve policy decision was a bit of a doozy 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 significantly curtail its quantitative tightening (QT) program – that is its sale of assets to reduce the money supply and raise interest rates – starting in June.

US Treasury yields fell on the news. The 10-year and 2-year yields were both down by .05 percentage points.

What happened: The Fed bought a ton of government-backed bonds between 2020 and 2022 to help support the economic recovery after the recession caused by the pandemic. Those purchases ultimately lower interest rates in certain parts of the economy, such as housing and car sales.

In mid-2022, when inflation spikes higher, the Fed reverses it and starts unloading the bonds.

The Fed currently allows up to $60 billion in Treasuries to mature each month without replacing them, reducing the amount of money circulating in the economy. The idea is that QT can help put downward pressure on prices.

But there are also some downsides to the practice – changing the amount of liquidity in the economy and moving that money around can have some big consequences.

As JPMorgan Chase CEO Jamie Dimon noted in his annual letter to shareholders last month, “we’ve never really experienced the full impact of quantitative tightening on this scale.” QT’s current pace is draining more than $900 billion of liquidity from the system each year, he said, adding, “I’m more worried [about it] than most.”

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 ran short of reserves.

This led to the “repo crisis”, where interest rates for overnight loans between banks rose unusually high. The Fed had to intervene and provide liquidity to lower the repo rate.

Fed Chairman Jerome Powell does not want a repeat of 2019 and said at his last press conference that the QT will be reduced soon.

On Wednesday, officials announced that they would lower the QT rate to $25 billion, more than half of what it currently stands at.

What it means: “May 1 is set to be a big day in bond markets,” Krishna Guha and Marco Casiraghi of Evercore ISI wrote in a recent note.

If the Fed eases its tightening policy, “financial markets will likely see the tapering of the QT program as an increase in prices for risky investments such as stocks and bonds on margin,” wrote Bill Adams, chief economist for Comerica Bank, in a note on Tuesday.

That’s because tapering should send bond prices higher, and interest rates lower.

That risk, Bank of America analysts wrote on Tuesday, “tends to the upside for stocks, in our view, especially given the potential QT tapering announcement.”

Justice Dept plans to reschedule marijuana as a low-risk drug
The Biden administration on Tuesday moved to reclassify marijuana as a lower-risk substance, a person familiar with the plan told CNN, a historic move that acknowledges the long-criminalized drug’s medical benefits and carries broad implications for marijuana-related research and the industry at large.

The US Department of Justice is recommending that marijuana be rescheduled 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, DOJ public affairs director, said in a statement. “Once published by the Federal Register, it will begin the formal rulemaking process as set forth by Congress in the Controlled Substances Act.”

The formal rulemaking process is lengthy, usually including a public comment period and can take months to complete.

The rescheduling recommendation, first reported Tuesday by the Associated Press, was welcomed by lawmakers on both sides of the aisle, including Rep. Republican Nancy Mace of South Carolina, who touted it on X as “major news for business, tax cuts & research hurdles.”

Rep. Democrat Earl Blumenauer of Oregon said in a statement that the rescheduling was “one step closer toending the failed war on drugs.”

Binance founder sentenced to 4 months in prison on money laundering charges
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 sentence, handed down in US federal court in Seattle, was far lighter than the three years prosecutors had argued for.

Before Tuesday’s sentencing hearing, Zhao, who is serving CZ, apologized for the mistakes he made as CEO of Binance, the crypto exchange he founded in 2017.

“Words cannot explain how much I regret my choice that caused me to be in front of the Court,” he said in a letter to the judge. “Be assured that it will never happen again.”

Binance agreed to pay more than $4 billion in fines and other penalties as part of a settlement reached with the federal government last fall. The company admitted to being involved in the prevention of money laundering, unlicensed money transmission and sanctions violations.

Zhao, who is 47 years old and has a personal fortune of nearly $40 billion, according to Bloomberg, agreed to step down as CEO and pay a $200 million fine.

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