FED: Gov Jefferson Telegraphs January Hold With Policy "Well Positioned"

Federal Reserve Governor Jefferson (permanent voter) hints strongly in a speech Friday (which is likely to be the final major Fed communication ahead of the pre-FOMC meeting blackout period that starts Friday night) that he will support the overwhelmingly expected hold at the January meeting (speech text here): https://www.federalreserve.gov/newsevents/speech/jefferson20260116a.htm. * With the cuts so far bringing Fed funds into "a range consistent with the neutral rate - a rate that neither stimulates nor restricts economic activity. I look forward to our upcoming policy meeting, which will be held in less than two weeks. While I do not want to prejudge the decision that will take place there, in my view, the current policy stance leaves us well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks." * We regard Jefferson as pretty close to the center of the Committee, and his views are probably not far removed from Chair Powell's, so all in all this leads us to expect Powell will take a similarly "cautiously optimistic point of view" at the January meeting. Indeed we would expect some of Jefferson's commentary on the labor market and inflation to be repeated almost verbatim by Powell. * Jefferson: "I am starting 2026 with a cautiously optimistic point of view. Conditions in the labor market appear to be stabilizing, and I see the economy as well positioned to continue to grow while inflation returns to a pathway toward our 2 percent objective....the labor market is not deteriorating rapidly, as layoffs remain low; however, hiring remains low as well... In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen. My baseline, however, is for the unemployment rate to hold steady throughout this year." * On inflation, "progress slowed over the past year or so, and inflation remains at a level that is above readings consistent with our inflation target" but "shelter inflation, shown by the black dot-dashed line, has continued to decline, and core services inflation excluding shelter, the red dashed line, has also been on a downward trend, albeit on a somewhat bumpier path. Those readings are consistent with overall inflation moving back toward our target....While some upside risks remain, moving forward I expect to see inflation return to a sustainable path back to our 2 percent target."

FED: Reserves Rise To 17-Week High (2/2)

On the other side of the balance sheet, the end of QT and restart of purchases has had its effect: reserves edged up to a 17-week high $3.061T in the latest week. * That's up $234B from the late October low, which had marked the lowest since 2000 and triggered increasing Fed concern over a lack of reserve "abundance" that soon led to the end of runoff. * The latest week saw a pickup in reserves of $39B, mirroring the decline in the US TGA, Reverse Repo, and currency in circulation. It's been similar over the last month, with a $128B rise in reserves netting out a $84B drop in the TGA and $14B in reverse repo, among other factors.

FED: Bills' Share Of Balance Sheet Starting To Pick Up (1/2)

The latest H.4.1 release from the Federal Reserve confirmed that bill holdings are rising following the decisions late last year to roll over MBS proceeds into bills and initiate reserve management purchases. * The balance sheet data show bill holdings are up $40B in the last month, including $8B in the most recent week to Wednesday Jan 13; over the last month conversely nominal+TIPS Treasury holdings are flat and MBS/Agencies are down $15B. * Net bill purchases should total $160B in reserve buys plus around $50-60B in MBS-rollover proceeds through mid-April, beyond which point reserve purchases are set to taper off. * At just 4% of SOMA holdings already up from 3.2% in early December) vs 58% coupons/33% MBS, there is plenty of room for bills' share to run on the upside.

US DATA: Trend Decline In Official China Holdings Of Treasuries Slowed In 2H25

* Of the $112bn monthly increase in the stock of foreign holdings of US Treasuries, Canada was the largest ($53bn) followed by the Cayman Islands ($19bn). * Looking at the stock of foreign holdings of US Treasuries, Japan remains in top spot ($1.07trn), followed by the UK ($0.80trn), China ($0.62trn), Canada ($0.43trn), and Belgium ($0.40trn). * China's formal Treasury holdings have been a longstanding decline although most recently that pace has plateaued, with zero net flows over the three months to November.