Core Viewpoint - The Federal Reserve, led by Chairman Powell, may end its balance sheet reduction process in the coming months to prevent liquidity issues in short-term funding markets, indicating a potential shift in its quantitative tightening (QT) policy and reinforcing expectations for another rate cut this month [1] Group 1: Federal Reserve's Policy Actions - Powell stated that the Fed's long-term plan is to stop balance sheet reduction when bank reserves are "slightly above adequate levels," which is nearing that point [1] - The Fed has been gradually reducing its holdings of Treasury and mortgage-backed securities since 2022 to withdraw liquidity injected during the pandemic, with a slowdown in the pace of reduction earlier this year [1] - Powell emphasized the importance of paying interest on reserves as a monetary policy tool to maintain control over short-term rates and financial stability [1] Group 2: Economic Outlook - Powell noted that since the September meeting, inflation and employment conditions in the U.S. have not changed significantly, but signs of weakness in the labor market are becoming more apparent [2] - The latest data revisions show a notable slowdown in job growth, increasing the downside risks in the labor market [2] - Due to a government shutdown affecting official economic data, the Fed is relying on unofficial channels to assess economic trends, which poses challenges for policy decisions [2] Group 3: Future Rate Cuts - Most Fed officials currently lean towards a 25 basis point rate cut at the upcoming meeting on October 28-29, with investors expecting this decision to be almost certain [3] - Analysts suggest that Powell's recent remarks aim to set market expectations in advance, indicating that if labor market weakness persists, the Fed may consider more significant easing actions by year-end while remaining flexible and cautious to prevent excessive market speculation on continuous rate cuts [3]

Core Viewpoint - The Federal Reserve's ability to pay interest on reserves allows it to inject liquidity when necessary without compromising interest rate control [1] Group 1 - The payment of interest on reserves is a strategic tool for the Federal Reserve to manage liquidity in the financial system [1] - This mechanism enables the Federal Reserve to respond effectively to market demands while maintaining its monetary policy objectives [1] - The approach helps to stabilize the banking system by providing banks with an incentive to hold reserves [1]

Core Viewpoint - The ability of the Federal Reserve to pay interest on reserves is crucial for effective monetary policy [1] Group 1 - The Federal Reserve's payment of interest on reserves influences the overall monetary policy framework [1] - This capability helps in managing liquidity in the banking system [1] - It plays a significant role in the transmission of monetary policy to the economy [1]