The Fed's Influence
The Federal Reserve controls the money supply and interest rates. This has profound effects on markets.
Key Mechanisms
1. Interest Rates
- Lower rates = Cheaper borrowing = Risk assets rise
- Higher rates = Expensive borrowing = Risk assets fall
2. Balance Sheet (QE/QT)
- QE = Fed buys bonds = Liquidity injection
- QT = Fed sells bonds = Liquidity drain
Liquidity Indicators
| Indicator | What It Shows |
|---|---|
| Fed Balance Sheet | Total assets held |
| Reverse Repo | Short-term liquidity parking |
| Treasury General Account | Government cash levels |
The Liquidity Equation
Net Liquidity = Fed Balance Sheet - Reverse Repo - TGA
When net liquidity rises, risk assets tend to follow.
Key Takeaways
- "Don't fight the Fed" is real
- Liquidity conditions drive risk appetite
- Watch balance sheet changes, not just rate announcements