It’s important to remember these pre-crisis days, where the Fed sounds like they’re doing a great job to steer the economy, and where economic stimulus isn’t even on their agenda. This is not an endorsement of the current state of the economy, but rather a reference point to look back upon when things get worse in the future.
The Quantitative Tightening thus far has been impressive, with over $1 trillion leaving the balance sheet, disappearing back into the ether from whence it came. Except for one mini-bailout of $400 billion in March, which can be seen as a small spike in the chart below, the trajectory has maintained its downward course for the last year and a half.
As for any plan to alter the balance sheet runoff, it appears there is none, as Chair Powell explained:
So, the committee is not considering changing the pace of balance sheet run off. It’s not something we’re talking about or considering and I know there are many candidate explanations for why rates have been going up and QT is certainly on that list. It may be playing a relatively small effect, although I would say at $3.3 trillion in reserves, it’s not…
In addition to not considering changes to the monthly balance sheet reductions, the Fed is also not anticipating rate hikes anytime soon.
According to the Chair:
So it’s, the fact is the Committee is not thinking about rate cuts right now at all. We’re not talking about rate cuts, we’re still very focused on the first question, which is; have we achieved a stance of monetary policy that’s sufficiently restrictive to bring inflation down to 2 percent over time, sustainably?
Reiterating:
The question of rate cuts just doesn’t come up because I think the first, it’s so important to get that first question as close to right as you can.
As far as (price) inflation goes, there similarly seems to be little concern that prices will go back down to the arbitrary 2% mark.
…it’s just clear that inflation expectations are in a good place, the public does believe that inflation will get back down to 2 percent over time, and it will, they’re right … that the public believes that inflation will come down and that’s of course, we believe that’s critical in winning the battle.
Assuming Powell is telling the truth, from what we know officially, the Fed doesn’t see a crisis brewing. They consistently emphasize their intention not to implement rate cuts or ease monetary tightening measures. All the while they are convinced the public believes that the 2% inflation target will be met, at some indeterminate time in the future. According to the Fed, they seem to be “winning the battle” for now.
The problem is that even if we agree with the Fed’s surveys and economic data points, and even if we believe the Fed is somehow winning an economic battle today, it doesn’t mean that they will win tomorrow. If the so far-so good attitude was a sufficiently useful method of predicting the future, then no one would ever be surprised.
It’s crucial to remember these alleged periods of prosperity because as soon as tough economic times emerge once more, the Fed won’t hesitate to reverse course on everything they’ve done in the last year and half.
