Per the full note from J.P. Morgan's podcast, the recent focus on Federal Reserve policy emphasizes a new structure with task forces, signaling a shift towards more coordinated decision-making in interest rate strategy. This indicates that the Fed may be preparing to navigate a complex economic landscape in the coming months, with implications for FX traders as interest rates remain a pivotal factor. The desk believes this new approach could lead to increased volatility in FX pairs, especially those sensitive to rate changes. Additionally, the evolving dynamics of global economic data will be critical for positioning ahead of upcoming events.
What the desk is arguing
The desk anticipates that the Federal Reserve's establishment of new task forces will enhance its ability to respond to economic changes. This shift suggests a proactive approach toward interest rate policy, potentially influencing the strength of the USD against major currencies. Per the full note, J.P. Morgan’s emphasis on this structural change indicates that traders should prepare for a period of heightened market activity.
Supporting this view, the Fed's ongoing adjustments in response to inflation and employment metrics hint at their readiness to collaborate more closely on monetary policy issues. The task forces are not just for internal efficiency but could signal adjustments to forward guidance, affecting market expectations.
The alternative read would suggest that if these changes are viewed as mere bureaucratic restructuring, markets may discount their impact, leading to a lack of volatility that traders generally wish to avoid.
01Fed's new task forces suggest a shift to a more collaborative monetary policy approach.
02Increased market volatility is likely as the Fed adjusts to economic conditions.
03Understanding these structural changes is critical for FX traders.
04Inadequate interpretation of these task forces may lead to missed opportunities.
Market implications
Traders should watch for shifts around the 1.10 mark in USD pairs, especially as new data on inflation and employment is released. Positions ahead of any guidance from the Fed could provide significant opportunities given the expected volatility.
Risks to this view
The main risk to this outlook comes from unexpected shifts in economic data that could force the Fed to alter its course. Stronger-than-expected inflation, for example, might lead to a hawkish pivot that conflicts with the collaborative intent suggested by the task force's formation.
Welcome to J.P. Morgan's At Any Rate podcast series. In this episode, we will be discussing Fed policy and the potential implications from the Fed working groups.
Now for your host and head of content strategy here at J.P. Morgan, Samantha Azzarello. Welcome everyone to our call on Fed policy and the task forces.
The Fed has been top of mind for investors, there's been a lot of focus on it, so we thought it would make sense to have Jay Barry, global head of rate strategy, and Mike Froehle, our chief U.S. economist, come and have a call on a piece they just put out last week, a joint piece on the task forces and going in depth on that. So we're going to have a little bit of a structured conversation, I'm sure they will go off the cuff, and then we will answer, they will, I know, and then we'll have client Q&A. And with that, let's get into it.
So great piece that came out last week, Mike, overall zoom out for us, what do the task forces mean? Okay. So I think the first thing to emphasize is these are the chair's task forces, right?
That chair works as task force. Second thing is last year, the Fed just underwent one of their about every five-year framework reviews, and that was a committee-wide effort, right? And so it wasn't just the chair, it wasn't just the board, it was the board and the 12 regional reserve banks all involved in the analysis.
So how do we interpret this? I think it's, you know, Walsh wasn't around for that framework review, but this is the way that he can, you know, kind of put a little bit of a stamp on the framework. Now, it might not be as ambitious as a framework review, right?
We're not, you know, when he had the first framework review, he shifted from inflation targeting to flexible average inflation targeting, and then he shifted back. So this isn't that ambitious in terms of, or potentially not that ambitious, balance sheet maybe. But I do think, you know, this is his way of saying, hey, I wasn't there for the framework review, can I have a little bit of say on the framework, you know, how the broad structure of the Fed's operating environment is thought about.
And then finally, I guess the big question is, in my mind, is, you know, how much does the committee, you know, buy into this, right? So for something to be implemented, it has to be either voted on by the board or by the committee, depending on what we're talking about. And if you really want to get into legalities of that, we talked with Scott Alvarez last week, the former general counsel of the Fed.
But basically, the big story here is that the committee, you know, his task force has come to conclusions, but the committee is going to have to buy into it. And it's going to be interesting to see how that plays out. I thought it was interesting that just last week, Governor Barr gave a speech on AI and what that meant for the labor market and did not mention the task forces at all.
Right. And one of the task forces is AI in the labor market. So I think, you know, that may be a sign that the rest of the committee is going to need some convincing before they just go along with whatever these task forces decide on.
The framework review that was done last year, how frequently would that have happened if we weren't going off with this one? Yes. So the first one was twenty nineteen.
And at that time, they said they would do it periodically and they said roughly every five years. It was six years. You know, the pandemic may have slowed things down.
And that that's generally what they've communicated, is that something like that would would be the schedule for kind of doing a seek to nuts review of how they how they look at things. I guess maybe another thing I'd add is that, you know, so I think a lot of focus has been on and we're going to talk more about the individuals who are staffing these various task forces, which were chosen by the chair and his people, you know, and I think there's a thought here that a lot of the people on the task forces have publicly aligned with some of the worst stated preferences. Right.
So in some ways, it's like, you know, to take a rabbit out of the hat, you got to put a rabbit in a hat. And I think that's what we saw taking place, you know, a few weeks ago. Jay, do you want to talk about the communications and balance sheet task forces, which you both mentioned in the report might be most consequential?
No happy Sam and good morning, everybody. So I think both have the possibility and the likelihood of being influential, not just in the policy sphere, but on the term structure of industry, which is, of course, what matters for what I talk about, because both of those factors have been key drivers of the risk free market of the Treasury market over the last two decades. And I think for many of the people who are on the webinar and for you in the room, you know, we know we had a forward guidance factor in our 10 year fair value framework in the various iterations of the times when the Fed was at the zero lower bound over the last 15 years.
And then we currently have a factor in it for balance sheet. So I think both have the possibility of being very impactful of the two balance sheet seems like it's more likely simply because it's now been a good 13 years, but still seared into our memories is what happened with the taper tantrum in the summer of 2013 when markets misinterpreted tapering to mean tightening and 10 year yields, for example, moved up about 150 basis points in the span of just about three months or so. So I think if you get balance sheet wrong, it can be very impactful for markets.
I also think it can be very impactful for markets because if everyone remembers what went wrong in September of 2019, where the Fed miscalibrated, where it thought the boundary between ample and scarce reserves sat. And after that tax day in the fall of 2019, money market rates completely decoupled from the Fed funds effective rate and repo rates, I think, moved about 300 basis points above the effective rate. Only for a short period of time, but nonetheless, it did really stilt the transmission mechanism of monetary policy.
So for both of those reasons, I think these task forces need to be constructed and be very thoughtful in their processes in order to make sure there are no adverse impacts. And of those two, balance sheet clearly seems very, very important because Chair Warsh has been very critical on the size of the Fed's balance sheet, both because of the footprint in the markets, how it potentially causes misallocation of capital, but also how it could cause monetary dominance. And again, just for a reminder on everyone in the webinar, in our frameworks, we think every one percentage point growth in the Fed's balance sheet as a share of GDP over the past five to 10 years has lowered long-term yields by about 10 basis points.
It's also flattened the curve by about five basis points, which makes sense. You're buying longer duration assets typically when you're at the ZLB. So the unwind of that could mean higher rates and steeper curves if done in a quick fashion, if the chair brings back tapering pretty quickly.
But the one thing I'd say there, and Mike already talked about this, there's already a fair amount of support for shrinking the Fed balance sheet in the academic and the policy sphere. There's been a number of papers released this year. The notable ones were out of the Dallas Fed by President Logan, former Governor Myron with his user's guide to shrinking the Fed's balance sheet, and then Daryl Duffy at Stanford and his paper for Brookings this spring.
And I think the unifying theme amongst those three papers is there's a way to shrink the Fed's balance sheet by reducing bank demand for reserves. So I think there's a pathway for the balance sheet committee to find a pathway to shrink the balance sheet, but as Chair Warsh said, if it took 18 years to get here, he's not going to bring the balance sheet back to where he wants it to be in 18 minutes or 18 months. So from that perspective, it needs to be done carefully, and I think if anything, we know that the Fed and Governor Bowman right now are in the midst of dealing with both Basel III endgame and the G-SIB surcharge after having tackled the ESLR reform last year, and next up is likely to be liquidity regulatory reform.
So the way to kind of get this accomplished would be alongside a changing liquidity regulatory and supervisory backdrop for the Fed, and we think that the balance sheet is likely if you do it the right way, you could see a decline in size by 600 or 700 billion from current size if you're able to reduce the bank demand for reserves in a way that doesn't disrupt the Fed's ample reserve framework. So over time, again, if you're doing that, that probably is worth 10-year yields moving higher by 15 to 20 basis points, yield curve steepening by 5 to 10 basis points, but if it's done over a longer period and more passive in nature, the impact is likely to be felt slowly and incrementally for the markets, and I think the easiest way to get there is for the Fed to just at some point cease the reserve management T-bill purchases it's making, and then perhaps if there's an eye to this regulatory reform being made, it can just stop reinvesting its mortgage proceeds back into T-bills at some point. Also on balance sheet, I think the duration of the Fed's holdings matter because they're a lot longer than the Treasury market itself, and the Fed's a passive participant when it rolls over its holdings at auction.
So instead of deciding to roll them over across the curve, prorata to whatever the Treasury is issuing, it could just do so at the short end of the curve and get the footprint shorter in duration which would be in Marsh's mind as well. And then finally on communications, you know, we have found that communications for the Treasury market have been more impactful on rate levels when you're at the lower bound and trying to convey to market participants that you're going to be on hold at zero for a period of time, helping to anchor rates at long-term rate levels to the extent that we're nowhere near the zero lower bound right now, probably less impactful. But if you shift in thinking from forward guidance to reaction function over time, it could have an implication for the volatility of rates and therefore for the term structure as well.
So then let's stick with communications. Mike, you can build off of what Jay talked about and then Jay, of course, pipe in. Dot plot and forward guidance, if there are changes with respect to those two variables, how do you think how the market interprets Fed speak and Fed signals might shift?
Yes. So I guess I would say first of all there are several forms of Fed communications. You mentioned one of them dot plot, another one forward guidance usually contained in the FOMC statement, but sometimes also in the chairman's press conference.
And then you have just various committee participants speaking all the time. And then you have some other things like the monetary policy report, which we had recently. So then we kind of have to think about what can the chair do on his own, his own preferences, how can they be expressed versus what needs to be done committee wide.
Dot plot and the statement, it seems like are pretty much committee decisions. Now on the dot plot, I, you know, I've publicly advocated getting rid of the dot plot or not getting rid of it, but that it's overt state, it's welcome, shoving it aside. And you know, I do think a lot of committee participants, you know, kind of feel sort of the same way.
So I could see that getting discarded. Now, the Fed, I mentioned earlier, they had a framework review last year in which the second half of last year, they spent reviewing communications, they came to no decision. Now presumably the dot plot was part of that review.
So what could be different this time? Maybe just having a new chair gives a little bit of an extra push that gets it over. So yeah, I think there's a decent chance you could do away with the dot plot.
I don't know if everyone on the committee would be happy with that. Certainly gives a voice to the bank presidents, particularly when they're not voting. I think the statement to the extent, you know, it drops forward guidance like we saw at the last meeting.
It'll be interesting to see how that sustains over time, right? Because at the last meeting, if you have, if you're very undecided on whether your next move is going to be a hike or an ease, it's easy to drop forward guidance, you know, we're not dropping anything. I think for, you know, going forward, if they have a very strong bias to hike at subsequent meetings or ease at subsequent meetings, you know, I think they might want to retain the option of forward guidance.
I also think what's interesting here, and something that I believe is outside the remit of the committee, the communications task force, is what the various FOMC members say. And I thought it was interesting, again, coming back to last week, besides Chair Warsh, there are six other governors, one of whom, Hal, said he wasn't, you know, he's going to keep quiet while he's in, stays in his seat. So you have, so you have five governors who, all of whom spoke last week, and, you know, three of whom gave pretty substantial remarks on the economy as well as the outlook for policy.
So, so if Chair Warsh decides, hey, I want to get rid of the press conference or reduce its frequency, he's just going to create a vacuum, I think, that is going to come. I know you brought that up in the piece, that if they're all talking and Chair Warsh is speaking less, it's just going to dilute his message in some sense, perhaps. Yeah.
Jay, would you add anything in terms of how market participants might have to have read throughs on all of this communication and context? First and foremost, I would second Mike's, not criticism, but I think view that the dots have probably overstayed their welcome in some form or the other. I think, again, they were very useful at the zero lower bound.
But one, I think, can argue that the multi-year head look at median projections can potentially dampen the transmission mechanism of monetary policy. And if I just look through the rearview mirror of the last hiking cycle that we went through from 2022 through 2024, after rates were above 3% and the Fed's estimated neutral rate is longer run dot, markets were always a year to two years forward pricing cuts. And while maybe distributionally, that makes sense, because once you move past a perceived boundary of neutral, then there's a reason to think that the bigger distributional risk is starting to go to the downside on weaker growth and looser labor markets.
But nonetheless, I think the markets are anchoring to the Fed's own projections there to an extent. But just to build on what Mike has said and about the governors, and you didn't mention my Governor Waller. He obviously made comments last week, but I thought his speech in Rome a couple of weeks ago was really important in that regard, because he talked about communications and how forward guidance may need to be changed, but that you need to understand the Fed's reaction function.
And to me, that's a very important story here, because if I look at the arc of monetary policy and its modern era over the last 30 years, statements, some forward guidance, SEP, press conferences, more speeches, an understanding of the Fed's reaction function, I think, is something that has helped lower implied volatility and volatility in rates markets, adjusting for policy rate levels. So if you unwind that and you have less insight into the Fed's reaction function, that could translate through over time to higher implied vol, higher term premiums, which to me read through again to a steeper yield curve, higher long-term yields, more negative swap spread, so cheaper treasuries on an asset-swipe basis as well. So I think it probably needs to be done in a way which is cognizant that, again, markets really care about understanding if you're not on hold with a neutral bias.
Markets need to understand which way you're leaning so you can react properly. Even understanding that you don't want this to be sort of like a feedback loop where its markets are looking at the Fed and the Feds are looking at markets without looking at the data itself. Yeah, I'd just underscore something Jay said, which I think within sort of the world of academia, let's say, or people who are very tightly linked to Fed policy, it's not that controversial to say, let's get rid of forward guidance, right?
I think if you, you know, guys like Rick Mishkin or Bill Dudley, they would all say, that's fine, but we want to elucidate the reaction function so that the market understands how we respond to data. And part of that is then when the data changes, Mishkin put it this way, the market does, heavy lifting 40, right? It gets there ahead of when the Fed actually has to move rates and helps transmit policy.
I think that was a criticism of Warsh's first couple of outings here is like, it's one thing to say, hey, I don't know what the next move is going to be, it's another thing to say, I'm not even going to comment on what's going on in the data or how I'm thinking about it. And can I just build on one more thing that Mark said right there? So we did a little bit of a dive into the first round of minutes in the Warsh regime and, you know, we all know that the Fed has this set of descriptive adjectives it uses to kind of denote with vague quantity how many participants and committee members were thinking a certain way within the minutes, all, most, many, several, some, few, couple, one.
The June minutes for a meeting in which there were nine participants who had a single hike in their dots for the year and six who had two and then the other nine who were rates on change to lower. There was a high degree of cohesion and consistency in these descriptive adjectives. So you only had to change 35 to 40 words within the minutes to actually dampen their value completely and make it seem like there's more uniformity, whereas Mike, as you said, what we discussed the minutes afterwards is like, it's not surprising to think that if inflation goes down, the Fed's actually going to ease or if inflation goes up, the Fed's actually going to hike.
But it gave us no insight into the reaction function whatsoever. OK. So before we turn to A.I. and productivity.
All of the advisers from the public and private side, in your view, were they mainly establishment? Was there anyone because some people are going to know academic economists, some are not. Is there anyone that you would cite in terms of they might be bringing an interesting new vantage or take to a task force?
Um, no, as I said, I think they were relatively conventional. You know, I think people have remarked that Mervyn King has some pretty, you know, clearly strongly held views on how central banks should communicate, you know, for a lot of other task force members. Kind of hard to say they don't have any public views.
So like Karen Dynan on the voucher committee. So, yeah, there are a few to watch, I think, as I said, Mervyn King. But yeah, maybe Tom Sargent would be great.
Are you just saying Tom Sargent because you went on my YouTube? That's OK. Let's go to in proximity.
So you both wrote how there might be a case where you get near term inflation followed by A.I. productivity induced disinflation or deflation, which is what Warsh has mentioned. Do you want to walk through that argument for everyone? Yes.
I think this argument seemed to be pretty popular a few years ago when I was kind of breaking out of the scene in a big way, which is simply higher productivity growth. You hold everything else constant, shove lower labor costs and lower inflation. Of course, in macro, you never want to hold everything else constant without a good reason.
And I think one of the strong arguments against this is, well, higher, higher productivity generally lifts real incomes, should lift real demand. So the effect on inflation is ambiguous, both in theory and empirically. Yes, everyone knows the 90s episode of higher productivity and you had lower inflation.
But that correlation doesn't always isn't always so clear cut. Right. So you can just think back to the post GFC period when you had very low productivity growth.
You had a very high inflation to the opposite, quite the opposite. So so there's that, which is in a big macro sense, it's not all that obvious which way productivity accelerations influence inflation at all. And I think there's also been more focus recently on the very near term effects of the A.I. buildout, most notably its impact on consumer prices for software and and computer accessories, which has been very strong.
It may partly get revised away in the B.C. measure, but you've also seen some strength in a few other categories like electricity that may be related to the A.I. buildout. So I think that side of things is also getting a little more notice and it did certainly a year or two ago. And I think when you hear many other people on the committee, including in his penultimate press conference, Chair Powell said kind of gave the same story, which is it's not all that obvious which way productivity or which way I'm sorry, what A.I. means for the direction that policy.
OK, so we have a few more questions, but I want to encourage anyone listening, if you want to put in a question, I'll make sure that Jane might get to it. Jay, why don't you build off the productivity view in terms of how what it might mean for rates markets, the neutral rate? Yeah, I think not to be not to espouse too much orthodoxy, Sam, but just building on what Mike said, if it is, in fact, an environment which does result in higher incomes, higher real GDP growth, I think the important pass through from my perspective is that probably leads you to a higher trend growth rate and all is equal, a higher neutral rate.
So probably the economy can sustain a higher policy rate without it actually restricting what the economy does. And again, we go back to the late 1990s example. You know, one can argue that the success that Chair Greenspan had at the time was not by easing, but actually just by refraining from hiking into a period of higher sustained productivity growth and higher neutral rates.
So that's the case. This isn't exactly making the case for a significant drop in policy rates just on that basis alone. And I know that was more popular earlier this year before the labor market began to recouple and before the war broke out.
But I think kind of still hear that residually from some market participants that we talk to. I just don't think it asymmetrically leads you toward a nice advice from that perspective either. OK, so why don't we end on a question around developments, if there was anything you both might be watching over the next six months that you're looking for in terms of communication from these task forces, signals, indicators, anything top of mind?
Nothing that's not obvious, right? So Chair Warsh said this would be done transparently, that we're going to hear periodically from the task forces. I think as that goes on, we'll have a better sense of whether these are really generating interesting new insights or if they're just kind of like...
Task forces. Yeah, exactly, like every other task force. Not that we're putting task forces down, we're just saying in terms of being able to actually enact anything.
Yeah. And I think from my perspective, just to sort of, I think, emphasize what we talked about before on the task forces, which could be most impactful for markets on communication, it's the delineation between forward guidance and reaction function. And then second, on balance sheet, is this accommodated in a nature or in a way which is proceeding only alongside regulatory developments?
Because if it's done ahead of them, then it could be actually more impactful in a negative way to the markets than might otherwise be expected. OK, so a few client questions to start. I think these two questions are kind of related, which is basically I think the gist of these two questions is, does the task force, is it a way to buy time?
Buy time, perhaps, you know, one story we hear is like, is it to buy time not to hike? Basically say, oh, well, hold on, we've got to wait and see what these task forces come up with. My opinion is only very marginal, right?
So let's say the next couple of inflation reports come in really hot. I think when you get to the September or later meetings, you know, you're not going to have governors sitting there and FOMC members sitting there saying, well, you know, inflation is accelerating, but we've got to wait for the task force to finish. They're going to, you know, act as a seafood.
Jay, would you add anything? No, I think it's a very, very important point, like covered all the bases there. OK, do you think Warsh signaled that they want or the Fed in general, that they want to keep the back end of the curve in check in any way?
I don't think the Fed is signaling anything on the back end. I think certainly Warsh in his communications has made the point that if you shrink the balance sheet, it could mean tighter financial conditions and thus give room to lower the policy rate. But importantly for me, when I think about the Fed's framework review, what it ratified in 2025 is that the Fed funds rate is the main lever it has for effecting change in monetary policy and the balance sheet is only secondary.
So it's unlikely to actually move rates if the balance sheet actually moved. And again, I think the implications for the balance sheet moving and done the right way is limited and not enough to translate through to a rates market move. However, I think away from the Fed, there is certainly, excuse me, a clear desire to lower long term rates for the administration.
That's been one of the, I think, ultimate stated goals. And you've heard Treasury Secretary Besson talk about it pretty frequently as well. And I think, you know, a couple of things there.
There is a Fed Treasury Accord, I think that's happening because, again, the nature of the Fed's holdings of treasuries are such that they're nearly three years longer in average maturity than the treasury market itself, which if it wants to reduce its footprint in the markets, it should pare back over time. And again, that could result in higher yields. But echoing back to what I said before, because the Fed is a passive participant at auction, it could just recycle its holdings through to shorter duration securities without having an impact on the market.
But it's helpful for the Treasury Department because then it could have a higher share of its debt at the short end of the curve and in a positively sloped yield curve environment, help mitigate any interest expense increase right there. But I also think the Treasury Department's been involved because they've been using this guidance that they don't see any need to change auction sizes for at least the next several quarters. That, we think, is guidance that is overstayed its welcome.
And it's probably something that's helping to anchor long term rates. So I think it's more coming from the Treasury than from the Fed. And pretty ironic that you've got the Fed stepping away from forward guidance at the same time that the Treasury is still using it in a sort of monetary policy style framework.
And you've written about this before. Is it the back half of the 2020s that we see issue with potential issue with Treasury issuance going up? Yeah, I think in our starting point, the Treasury Department is very well funded for this year.
But if you look into fiscal 27 and beyond, there is a funding gap of about three and a half to three and three quarters trillion that would need to be addressed and will require more duration supply at point. We think it begins to happen next February. But we've written in our research the risk is it could be later, given that the Treasury Department has not yet changed its guidance whatsoever.
A few more questions, because we're getting some good ones from clients the way we always do. This is a good one. You like this one?
Well, I mean, so the question is basically and well, it's one that I'm getting kind of, so I think might as well address it, which is basically could the inflation task force sort of switch the goalposts here? So most notably, Tremaine, something he mentioned in his confirmation hearings, there are a number of other metrics like that. So basically moving around what their actual target is, what they're trying to target, I should say.
I think, you know, it's possible. So the framework review I mentioned earlier was really inspired by the Bank of Canada, which started doing this previously. And one of the first things they looked at was like, hey, which measures inflation should we target?
Now they have this kind of a whole bunch of more technical measures and discourse. You know, and I do think it's possible at some point we would we could go to something like a comfort zone, like a range one to three percent, something like that. Moeller did mention that, didn't he?
Yeah, he did. And two things I mentioned, one is that's, again, not to be a broken record here, but that's going to be a committee decision. And the second thing is this is something they will need to be you need to tread very carefully politically when it comes to communicating with Congress what they're doing, because you've already seen on both sides of the aisle a lot of concern that the Fed could be playing fast and loose with the congressionally given mandate for stability.
And I'd add, if I can just chime in on that, too, Sam, is that the markets will care about this as well, because if you attempt to move your goalpost on inflation when you haven't hit the target in 63 or 64 months, market based inflation expectations, which have been very, very well anchored here and in fact have declined since the chair's first press conference about a month ago, they would be at risk of rising, which would something be something that actually would result in, once again, yields rising at the long end of the curve as well. And remind me, has Warsh doubled down or mentioned the importance of keeping inflation expectations anchored? It's been pretty consistent on that.
Or it's just a given that. Yeah. Talk about being resolute in their stance to get inflation back to target, which is a way of implicitly anchoring expectations, I think.
Yeah. OK. That's good.
That is not me asking that question. Yeah, I mean, look, I think on this one, the question is so building off the earlier question with the task force to delay a hike, even if they don't, they delay communications around policy adjustment, adjustments. And I think we're we're living in that world right now.
We're seeing and I think we're we on the outside are kind of rethinking how we listen for change in reaction function or confirmation of how they're going to react to the data. And, you know, as I mentioned earlier, you see that a little bit placing more emphasis, relatively more emphasis on what Waller is saying and Cook and Jefferson and Williams. And that could be, you know, until we get to the new framework, if there is any new framework, this is how we're going to have to proceed.
So a question around the balance sheet for Jay, could the balance sheet task force surprise positively for risk assets if the deregulation required to lower bank reserve demand supports more broker dealer risk taking? That's interesting. I think it's actually it could be very helpful for intermediation and market, Sam, more so than for risk assets themselves.
And maybe like there is a secondary read through that it would be a positive for risk assets overall. But what we've seen in the year to date, and again, I'll look at it through the narrow lens of just the rates market, which was what I where my subject matter expertise is, is we've seen in the year to date most measures of rates market and treasury market liquidity improved substantially. Market depth is moving higher.
One could argue that's because the Fed's on hold and because the Fed's on hold follows lower and that helps it out. But dispersion to a fitted curve, which is how we measure how less liquid off the run treasuries trade is at multi-year lows. The impact of treasury trades is at multi-year lows.
And importantly, dealer balance sheets as a share of the treasury market are basically at their highest level since the GFC. So I think there's more intermediation that's already happening right now. And I think about it holistically.
It's not because of the task forces, but because we're in this regulatory regime shift. And again, Vice Chair Bowman took care of ESLR reform in a six month time period last year, is in the midst of working on two major pieces of regulation right now, and then is likely moving to liquidity. I think it's helping the financial system understand that maybe capital that was, you know, generated can now be used for businesses for intermediation rather than having to be reserved for higher capital ratios in the future.
So I think it's an intermediation support and maybe there's a halo effect for valuations, but that's the primary transmission mechanism in my mind. OK, so it matters, but there's a whole ecosystem of how this works underpinning it. Do we like that question?
We like all client questions, to be clear, but this is a benefit to hiking and surprising. Is there a part of Chair Warsh's mind that may see the benefit of hiking in July and surprising the market? It seems to be his call.
It underpins his no guidance and likely to be framed as a tactical adjustment. I mean, there could be a benefit if you if you were worried about inflation expectations getting out of hand. Right.
And, you know, I think that was a big reason why Fed quickly pivoted from twenty three from twenty two from signaling when they went from fifty to seventy five in my years. It's twenty two. That was in June of twenty two.
Yeah. You know, a big motivation there was concern about inflation expectations. So so there could be a benefit.
Again, the surprise, you know, it certainly would surprise markets. But I think if. It would kind of back foot, I think.
Well, it could happen. OK, I mean, certainly financial conditions are a tailwind for the economy right now, which is what we've been arguing. If you're surprised, but say it's only tactical.
I don't know if the markets necessarily believe you that could tighten up pretty quickly. So we're going to get to this client question. I want to ask one really quickly.
We've had to focus a lot on the president and executive power. What's possible? So if we were to look at the Fed and look at Chair Walsh, what's possible unilaterally that he could do without committee buy in or vote or approval?
Yeah. One thing that seems pretty obvious is his own communication, which is primarily the posting of press conferences, as well as any other speeches he chooses to give or not. Beyond that, he has.
Power by convention to on a day to day basis, be the executive overseeing staff, but longer on decisions about staffing itself, those are all board votes. So I think the biggest thing, though, is probably his own his own communication. Client question, what do you think the Fed will do with recommendations from the data task force?
Ultimately, it would likely require federal funding for statistical agencies to collect more data and process it properly. Or do you think the intention is to is to avoid, excuse me, involving other agencies? Yeah, I think that's a that's a great question because it's a really odd task force, this data one, right?
If the recommendation and as I mentioned earlier, the staffing matters here and the staffing seems like it's being lined up to recommend using more alternative data sources, primarily private sector, payroll data, scanner data, things like that. Which is fine. No one's going to.
And I mentioned the piece that I was a co-author on a piece earlier this year that made just that recommendation to the Fed. We had two Fed presidents comment on it and said, yeah, you know, of course, we're going to use as much data as we can. And arguably, the Fed staff itself has been leaders in using or trying to use alternative data.
But again, I think the fact that some of these got a lot of this outside of the Fed's remit, right? They don't have any power to collect or they don't really collect data. I mean, they produce the industrial production report.
They collect some banking data, but that's a byproduct of regulatory powers. So, you know, I think a lot of people would say, hey, you know, the BLS and census are kind of their budgets are declining in real terms. And I don't think the task force can really make recommendations for the administration how it should spend on data collection.
Right. So I think that's why it is kind of a funny, funny task force to see what they ultimately are able to to do substantively. Jay, would you add anything?
The only thing is, and this is just sort of, you know, in my memory bank from recent history. So there is some biases. We just went through the longest government shutdown in history and there were no private sector data providers in real time that were able to replicate what the official sector data does.
And Mike wrote a piece on how, yes, the sample of the payroll report has gone down over time, but it's still significant. And then we've written notes about how the monthly employment data is the richest cross section of data that we have globally and the most impactful data point for the markets in a given month. So, yeah, I just think it's going to be hard to replicate whatever we've already got.
Yeah, I think the consensus among most data users is that alternative or private sector data can be a complement, not a substitute for the official data. Last client question, and I think you've woven answers to this throughout the conversation, but do you think there's some sense of inertia for the Fed while they're wrapping up the outcome and output of these task forces? Again, I think on policy, maybe only at the margin, if the data tells them they need to hike or cut, then they'll do it.
They're not going to wait around for the task force. And again, I think what you've seen from other members is that both in their speeches and how they're thinking about policy, they're carrying on as though, you know, they're operating with a framework that was agreed to. I mean, they're giving speeches in Rome.
They're talking all over the place. Right. So so I don't think it's going to have that big an influence, particularly if the other, you know, if everyone else on the committee is kind of being frozen out of this process until the conclusion of the task forces.
I don't think they're going to say, you know, we should be bound by something that we're not even involved in. OK, so thank you so much for joining, Mike, Jay, thank you for your insights, and that concludes today's webinar. This communication is provided for informational purposes only.
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Morgan Chase & Co., all rights reserved. This podcast was recorded on Monday, July 20th, 2026.