Powell turned the rudder sharply: interest rate cuts will not stop, balance sheet shrinkage will stop, who will drink this bowl of "bailout water"?

A statement from Washington on October 17 made Powell the focus of global markets—"The continued push for interest rate cuts and the imminent end of balance sheet reduction" sent gold skyrocketing, while U.S. Treasury yields plummeted, injecting a strong dose of excitement into the previously quiet market. Yet, at this moment, the U.S. government is facing a shutdown, with key data such as CPI and non-farm payrolls collectively "missing in action." In this data vacuum, Powell is rushing to "release liquidity"; what exactly is he afraid of?

The answer may be hidden in the "repo crisis" of September 2019. At that time, the overnight rate soared to 10%, and money market funds were on the brink of collapse, becoming an enduring shadow for the Federal Reserve. Now history is repeating itself: on October 15, the SOFR rate surged by 10 basis points in a single day, and the size of the repo market has shrunk to only $800 billion, a direct decrease of $200 billion compared to four years ago. The liquidity faucet has been tightened too much, and the market has long been sending out painful signals.

The more deadly issue is the fragility of the banking system. Currently, bank reserves are only $2.8 trillion, accounting for just over 10% of GDP, while Morgan Stanley has long warned that this ratio falling below 8% could trigger systemic risks. What appears to be ample reserves is, in fact, vulnerable to any run on the bank. Powell knows better than anyone that if the balance sheet continues to shrink, the first explosion will not be inflation, but a new round of "money shortage."

The weakness of the real economy has provided a "staircase" for a policy shift. GDPNow has revised the third-quarter growth rate down to 1.2%, and temporary job positions have been declining for five consecutive months—this is akin to a night market vendor first withdrawing their small stall; how far can the main store’s business decline be? The manufacturing PMI has also dropped for eleven consecutive months, and these fragmented signals have long pieced together a picture of the "economy rapidly hitting the brakes."

The market votes with its feet, embracing loose expectations in advance: gold approaches $1950 within ten days, up nearly $100; the yield on ten-year U.S. Treasuries has fallen back 30 basis points from its high, and stocks and emerging markets have surged 3% within a week. However, a single "tax increase" from Trump caused soybean prices to fluctuate by 2.5%, pouring cold water on the celebration—policy noise has never dissipated.

Some have dug up the script from 2019: in the half year after the tapering ended, the S&P 500 rose by 15%, and gold increased by 18%. But times are different now: back then, core PCE was only 1.6%, and government debt was 107% of GDP; now, core PCE is still as high as 3.9%, and the debt ratio has soared to 123%, compounded by the geopolitical conflicts in Ukraine and the Middle East. Pouring the same "water" into a thicker "pot," whether it overflows into an asset bubble or a resurgence of inflation, no one is willing to guarantee.

If the FOMC meeting in November finalizes the schedule for tapering, and the dot plot in December adds more interest rate cut arrows, the market's celebration is likely to escalate. But we must be clear-headed: easing can solve immediate problems but cannot cure long-standing ailments. The number of corporate bankruptcies in 2024 has reached a 14-year high, and the impact of high interest rates on debt is still fermenting. If easing gets the rhythm wrong at this time, the market will inevitably return a louder "repurchase slap" to Powell.

Ultimately, turning on the liquidity faucet only takes a moment, but turning it off often comes at a cost. The current rise in stocks and gold is merely a rehearsal; the real suspense lies ahead: when the flood of dollars is unleashed, who will be the final payer?