September 28, 2022

Fed Balance Sheet Reduction Not really Delivering as Promised

Here’s the reality. Two months after the official start of QT, the Fed has decreased Treasury holdings by about fifty dollars billion — $10 billion less than the plan. Meanwhile, Mortgage-Backed Security holdings increased by over $10 billion!

The Federal Reserve will be all-in on the inflation fight.

Or even is it?

Whilst everybody focuses on  interest rate cuts , the particular promised Fed balance sheet reduction isn’t going quite as promised.

Balance sheet reduction, technically known as quantitative tightening, has been supposed to start in May. The particular FOMC statement released after the July meeting claimed that “ the Committee will continue reducing its holdings of Treasury securities plus agency debt and company mortgage-backed securities, as defined in the Plans for Decreasing the Size of the Federal Reserve’s Balance Sheet that were released in May. ”

The problem with this claim is that the Fed can’t continue what hasn’t really started.

The plan announced in May was for $30 billion dollars in US Treasuries and $17. 5 billion in mortgage-backed securities to move off the balance sheet in June, July and Aug. That totals $45 billion per month. In September, the particular Fed plans to increase the particular pace to $95 billion per month.

This isn’t a particularly aggressive roll-off to begin with.   At $95 billion per month, it would take  7. 8 years   for the Fed in order to shrink its balance linen back to pre-pandemic levels. And it’s really not even keeping pace with its own tepid plan.

Here’s the reality. Two months after the official start associated with QT, the Fed offers reduced Treasury holdings by about $50 billion — 10 dollars billion less than the plan. In the meantime, Mortgage-Backed Security holdings  increased   simply by over $10 billion!

Of course , today we all live in a world where it could all about spin. Despite the Fed’s failure to deliver on a poor plan, Jerome Powell demands everything is fine.

“ So we think it’s working fine… And in September, we’ll go to full strength. And the markets appear to have accepted it. By all assessments, the markets will be able to absorb this. And we anticipate that will be the case. So , I might say the plan is broadly on track. It’s a little bit slow to get going because some of these deals don’t settle for a bit of time. But it will be picking up steam. ”

Also,   there is no recession .

Despite Powell’s assurance, the markets have not “ absorbed this” particularly well. As an content on the  Mises Institute Power and Market blog notes , inspite of the slow pace of tapering, we’re still in the middle of a bust. The NASDAQ can be down 20% on the calendar year and the S& P 500 is down 13. 5%. And as  our own technical analyst noted , “ the Fed’s simple exit from increasing their particular balance sheet is already being felt in the bond market with massive congestion in the produce curve. ”

This calls into question the particular Fed’s commitment to fighting inflation. If the central financial institution truly viewed inflation as “ public enemy No . 1” and believed the particular economy is strong enough to deal with tighter monetary policy, precisely why isn’t it aggressively decreasing its balance sheet?

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