On February 8, the Federal Reserve released its semi-annual monetary policy report, which mentioned that the Federal Reserve continued to significantly reduce its holdings of U.S. Treasury bonds and agency securities in a predictable manner. Since June 2024, the Federal Reserve has reduced its holdings of $297 billion in securities, and its securities holdings have decreased by about $2 trillion since the start of the balance sheet reduction. The Federal Open Market Committee (FOMC) stated that it intends to maintain securities holdings at a level consistent with the efficient implementation of monetary policy under an ample reserve system. To ensure a smooth transition, the FOMC slowed the decline in securities holdings in June 2024 and intends to stop reducing securities holdings when the reserve balance is slightly higher than the level it believes is consistent with ample reserves.
Supported by a solid labor market and rising real wages, consumer spending continued to grow strongly, while real corporate fixed investment grew moderately. In the real estate market, new housing construction performed solidly, but existing home sales remained sluggish as mortgage rates remained high. Unlike GDP, manufacturing output was little changed, in part because of weak production in interest-sensitive sectors.
The U.S. financial system remains robust and resilient. Valuations remain elevated relative to fundamentals across a range of markets, including equities, corporate debt, and residential real estate. Total debt of households and nonfinancial corporations as a share of GDP continues to decline and is now at very low levels compared with the past two decades. Most banks report capital levels that are still well above regulatory requirements and have reduced their reliance on uninsured deposits, but some banks still have large fair value losses on fixed-rate assets. In terms of funding risks, although the 2023-2024 SEC reforms to money market funds (MMFs) have partially mitigated the vulnerability of major money market funds, other less regulated short-term investment vehicles remain vulnerable and less transparent, and their asset size continues to grow. At the same time, leverage among hedge funds appears high and concentrated.
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