CICC: The Fed has reason to slow down its balance sheet reduction before the third quarter, as strong consumption increases uncertainty about interest rate cuts

A CICC research report stated that the basis for judging when the Fed will decide to slow down the balance sheet reduction is whether reserves are sufficient. Based on our calculations and Fed officials’ research on appropriate reserve levels, at the current rate of balance sheet reduction, financial flows in the third quarter of 2024 It may be a non-linear change from the current excess abundance (abundant reserves) to moderate abundance (ample reserves, which means the reserve ratio is close to 13%), and then to scarcity (scarcity). Therefore, the Fed has reason to slow down before the third quarter, not only to prepare for a rainy day, but also to hedge against the pressure of long-term bond issuance starting in the first quarter. In addition, the research report stated that the latest data showed that U.S. retail sales increased by 0.6% month-on-month in December 2023, setting the strongest growth rate in three months. Looking forward, strong consumption will increase the resilience of the U.S. economy and reduce the possibility of recession. As the risk of recession declines, the urgency for the Federal Reserve to cut interest rates will also decrease. CICC believes that the Federal Reserve may not cut interest rates in March as the market hopes, and the expectation of six interest rate cuts throughout the year may be too aggressive. (Golden Ten)