Fed balance sheet reduction fails to deliver

by SchiffGold 0 0

The Federal Reserve is all about fighting inflation.

Where is it?

While everyone’s focus is on interest rate cuts, the promised Fed balance sheet reduction isn’t quite happening as promised.

Balance sheet reduction, technically known as quantitative tightening, was due to begin in May. The FOMC statement released after the July meeting asserted that “the Committee will continue to reduce its holdings of Treasury securities and agency and agency mortgage-backed debt securities, as described in the the size of the Federal Reserve balance sheet that were released in May.”

The problem with this statement is that the Fed can’t continue what it didn’t really start.

The plan announced in May called for $30 billion in US Treasuries and $17.5 billion in mortgage-backed securities to exit the balance sheet in June, July and August. This totals $45 billion per month. In September, the Fed plans to increase the pace to $95 billion a month.

It’s not a particularly aggressive roll-off to begin with. At $95 billion a month, it would take 7.8 years old for the Fed to bring its balance sheet back to pre-pandemic levels. And he’s not even keeping pace with his own lukewarm plan.

Here is the reality. Two months after the official launch of QT, the Fed reduced Treasury holdings by about $50 billion, or $10 billion less than expected. Meanwhile, holdings of mortgage-backed securities increase more than 10 billion dollars!

Of course, we live in a world today where everything revolves around spin. Despite the Fed’s failure to implement a lackluster plan, Jerome Powell insists all is well.

So we think it’s going well… And in September, we’ll be full. And the markets seem to have accepted it. By all assessments, the markets should be able to absorb this. And we hope it will. So I would say the plan is broadly on track. It’s a bit slow to get started because some of these trades don’t settle for a while. But it will grow. »

Moreover, there is no recession.

Despite Powell’s assurance, the markets haven’t “absorbed this” particularly well. Like an article on Mises Institute Power and Market Blog Notes, despite the slow tapering, we are still in the middle of a bust. The NASDAQ is down 20% on the year and the S&P 500 is down 13.5%. And as our technical analyst noted, “the Fed’s mere exit from expanding its balance sheet is already being felt in the bond market with massive yield curve congestion.”

This calls into question the Fed’s commitment to fighting inflation. If the central bank really considered inflation “public enemy number one” and believed the economy was strong enough to handle tighter monetary policy, why isn’t it aggressively shrinking its balance sheet?

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