A Trillion (Dollar) Reasons Why Yellen Is the Policymaker to Watch Now

 | Apr 25, 2024 19:52

Here is a trillion (dollar) reasons why the US economy is likely to hold up until elections: between now and then, Yellen is likely to drain the Treasury General Account (TGA) and unleash a wave of almost $1 trillion liquidity on markets and the economy.

In a second, I am going to walk you through the mechanics of the TGA drainage and its impact on markets.

But before we do that, it’s important to take a step back and reflect on this: mastering the mechanics of the various monetary plumbing operations like QE, QT, fiscal deficits, RRP and TGA refill/drainage will provide you with a sizeable edge as a macro investor over the next decade.

Nominal incomes are growing at 6%, and real GDP is cruising nicely at around 2%.

The labor market still holds okay, and there are no clear signs of broad economic weakness.

How can we square this with one of the most aggressive hiking cycles in history which brought Fed Funds above 5% for almost a year and counting?!

The answer lies in private sector balance sheets and fiscal stimulus.

Higher interest rates generally slow down economic activity: corporates and households face higher debt servicing costs and therefore they must cut capex/hiring/spending to allocate more resources to debt servicing.

Lower spending = the economy slows down.

In other words: higher rates tend to negatively affect the liability side of private sector balance sheets.

But what if this time that’s going to take much longer, and in the meantime the opposite is happening?