We have frequently written over the past few weeks that the Fed ought to increase its Fed Funds Target Range by 100 BPS to 3.25-3.50% on Wednesday at 2:00pm during its FOMC meeting. The 2-Year Treasury yield (a Fed barometer) sits at 3.95% and the Fed ought to be a fast follower of the 2-Year in our view. More important will be any change in the Fed’s view on Quantitative Tightening (“QT”), a more efficient way to tighten the money supply than artificially manipulating interest rates.
Regarding QT, the Fed continued to modestly reduce its Treasury security holdings last week by $3.7 billion. Simultaneously, the central bank increased its Agency security holdings by $9.2 billion. Thus, the Fed tightened on the Treasury side while it loosened operations on the Agency side (see charts below).
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