Cutting dividends, lowering interest rates, and removing regulations: Could Washington's "asymmetric" script actually be beneficial for the stock and bond markets?

Kevin Wash faces the challenge of how to reduce the Fed's presence in the financial markets while avoiding inadvertently tightening financial conditions. Wash has repeatedly advocated for reducing the balance sheet and focusing more on inflation stability, which has earned him a reputation as a hawk in history. At the same time, he has recently expressed support for lowering borrowing costs. The main concern in the industry currently is that this unconventional combination of positions may lead to tightening financial conditions and create a structurally high-volatility environment across various assets. The weakening of liquidity support due to the reduction in the size of the asset holdings by the central bank will increase market risk premiums. Reducing the balance sheet could also raise term premiums, thereby pushing up discount rates. This will compress the value of future cash flows, thereby reducing stock valuation multiples - a dynamic that will have the most severe impact on loss-making or highly-leveraged firms, as investors discount uncertainties and longer-term returns more heavily and factor in more expensive financing costs. However, macro strategist Michael Ball points out that despite the various risks in his policies, Wash still holds a trump card: his view of excessive Fed intervention aligns with Treasury Secretary Benson, which creates the potential for an informal agreement between the two institutions - ultimately benefiting risk assets. "The Wash-Benson" World Benson has previously stated that more predictable bond issuances will dampen uncertainty in supply, coupled with positive buyback programs and bank regulation reform, will reduce the compensation demanded by investors when worrying about sudden changes in auction size and term combinations. In this regard, Ball states that under the "Wash-Benson" model, the Fed's balance sheet reduction can match a predictable Treasury debt plan, allowing the market to have a clearer understanding of liquidity and supply. If the issuance path of the Treasury Department and the shrinking of the Fed's balance sheet remain stable and credible in the long term, unexpected tightening of financial conditions can be avoided, and any non-compulsive shocks in the interest rate market will be limited. In addition, Wash's inclination to lower rates will bring price appreciation potential to the front end of the yield curve. Meanwhile, as the central bank reduces its balance sheet, the prospect of debt issuance becomes more stable, excess liquidity is effectively controlled, and any higher term premiums on long-term treasuries may consequently be relieved, collectively reducing premium compensation. Impact of Reforming the Fed Ball also points out that in addition to the impact on cross-asset volatility, Wash's inclination to reduce the Fed's influence in the financial markets implies that power over fiscal and regulatory reform will be returned to government officials. This will help strengthen market discipline and restore accountability mechanisms to the state before the global financial crisis. Under the Fed's current system of interest rate floors, the potential of regulatory reform is crucial. The fundamental restraint on balance sheet reduction for banks lies in their demand for reserves. Under regulatory requirements, banks are forced to hold large amounts of reserves and treasury bonds as high-quality liquid assets. Relaxing regulations, lowering liquidity thresholds, and structural demands for reserves will curb volatility in repurchase transactions and release trading firms' balance sheets, enabling them to intermediat...