Insights on Monetary Policy from Andy Constan’s Recent Interview
This week's discussion featured Andy Constan, CEO of Damped Spring, focusing on the Federal Reserve's balance sheet and its implications for markets.
Key Takeaways
- QT 2.0: The Fed aims to align the weighted average maturity (WAM) of its balance sheet with that of Treasury debt, which currently differs (8 years vs. 5 years). QT is ongoing, requiring the market to absorb more duration.
- Debt Ceiling Dynamics: The ongoing debt ceiling impacts funding markets through TGA drawdowns. The FOMC minutes suggested a potential pause in QT to mitigate volatility linked to the debt ceiling. QT has primarily drained reserves without affecting bank reserves significantly.
- Bessent’s Treasury Issuance: Scott Bessent's strategy continues the bill-heavy issuance approach from his predecessor. Changes in the fiscal deficit will influence the proportion of bills versus coupons issued. If deficits rise, reliance on bills increases.