The Federal Reserve is shrinking its balance sheet, albeit at a snail’s pace. Let’s see how they’ve done compared to last month. Per latest data release:
- On July 6 the US Treasury (UST) balance was $5,744,344,000,000. The balance on August 3 now stands at $5,719,119,000,000, for a reduction of roughly $25.2 billion.
- On July 6 the Mortgage-Backed Security (MBS) balance was $2,709,336,000,000. The balance on August 3 now stands at $2,717,552,000,000 for an increase of roughly $8.2 billion.
Two months after the official start of Quantitative Tightening, the Fed has reduced Treasury holdings by about $50 billion… while Mortgage-Backed Security holdings increased by over $10 billion!
Think about the stock market in this same amount of time, after a net reduction of just $40 billion in June and July, the worst is still ahead, if all goes according to the plan. As it currently stands, after August, the UST reduction limit will increase from $30 billion to $60 billion a month, while MBS goes from $17.5 billion to $35 billion.
This is strange for a variety of reasons, one being the gross lack of the Fed’s credibility. Since they only reduced Treasuries by half of the maximum limit while increasing the MBS holdings, it’s difficult to fathom that they’ll start accelerating QT by next month.
Yet, in Jerome Powell’s world, everything is fine and, by September, we’ll feel the full force of the Fed’s tightening. Just last week, when asked how the balance sheet reduction is going, he responded:
So we think it’s working fine… And in September, we’ll go to full strength. And the markets seem to have accepted it. By all assessments, the markets should be able to absorb this. And we expect that will be the case. So, I would say the plan is broadly on track. It’s a little bit slow to get going because some of these trades don’t settle for a bit of time. But it will be picking up steam.
It’s unclear what he means by the trades not settling on time, that doesn’t explain why the MBS balance has seen two months of increases. Nonetheless, he claims the tapering will be “picking up steam,” so we’ll be watching and waiting.
It’s important to reiterate that, despite the slow pace of the tapering, we are still in the middle of the bust. The Fed has abandoned easy money policies. So until further notice, we must accept that rates will continue to rise and the balance sheet will continue to shrink. The yield curve on the 10-year minus 3-month reached 0.04 last week, per the Fed’s data, and is destined to go negative any minute now.
This author reminds readers to not be fooled with stock market rallies, Russia’s war, Putin’s price hikes, an invasion of Taiwan, any government promise to reduce inflation, or other media distraction. The days may be slow, but the crash will come fast. With monetary and fiscal policies long since destroying the economy, much of the average person’s attention is forced to focus on stock market speculation and ways to prepare for more dollar destruction; so please remember, without the Fed’s Marvelous Magical Touch due to the return of Quantitative Easing, tread carefully in the market, if at all.
