Fed’s QT Taper Talks Already Behind the 8 Ball

On June 1, 2022, Federal Reserve Chairman Jay Powell officially began quantitative tightening (QT). The Federal Reserve’s balance sheet exceeds $8.9 trillion. Consumer price inflation has soared to its highest level in 40 years.

“cheer up,” advise Jamie Dimon, CEO of JPMorgan Chase at the time.

The master plan was for the Fed to reduce its holdings of Treasury bonds and mortgage-backed securities by $47.5 billion per month over the first three months. Then, in September 2022, this monthly decline increased to $95 billion (e.g., $60 billion for Treasury bills and $35 billion for mortgage-backed securities).

Except for a sudden $400 billion surge in March 2023, when Silicon Valley Bank, Signature Bank, and First Republic Bank all failed in quick succession, QT has continued as planned. today Fed’s Balance Sheet That’s just under $7.7 trillion.

The next FOMC meeting will be held on January 30th and 31st. wall street journal The Fed is now considering changing its plans.

“Fed officials plan to begin deliberations on slowing so-called quantitative tightening as soon as this month’s policy meetings begin. This could have significant implications for financial markets.

“The Fed can reduce its holdings by selling bonds, or it can ‘burn down’ its balance sheet without buying new bonds by allowing them to mature, as it prefers. A runoff puts upward pressure on long-term interest rates by increasing the supply of bonds that investors must absorb. “Slowing the outflow reduces the upward pressure.”

At this point, the Fed has suffered a small loss of $1.2 trillion in taking assets financed with fun money off its books. But this is a far cry from returning to pre-COVID-19 levels of $4 trillion or pre-Great Recession levels of $900 billion.

And given that the Fed is likely to reduce the QT rate over the coming months, shrinking the balance sheet to January 2020 levels would be nearly impossible.

What to make…

unconscious bias

Canceling the radical and extreme money printing galas that took place from 2020 to 2022 was never a realistic proposition. This has already been demonstrated by the Fed’s failure to remove the massive reserve piles added to its balance sheet during the 2008-13 money printing scandal.

John Maynard Keynes, a Fabian socialist and the godfather of modern economic planning, said in his 1935 book: General theories of employment, interest, and moneywrote:

“Practical people who believe themselves to be completely immune from any intellectual influence are usually slaves to dead economists.”

If you remember, in late November 2008, Federal Reserve Chairman Ben Bernanke permanently sold out America’s savers and workers. He couldn’t resist. He was subject to unconscious bias.

Bernanke, a top academic and Great Depression history buff, looked back 80 years. What he thought he saw scared the people who were scared of him. With a keen eye, he observed similarities between the early 1930s and many credit markets. He then made a preconceived diagnosis.

Afterwards, he dusted off his desktop copy. American monetary historyThe book, written by Milton Friedman and Anna Schwartrz, moves on to a chapter on the Great Depression and the beginnings of inflating the money supply. In doing so, he permanently damaged the world.

Bernanke first launched quantitative easing (QE) by purchasing $600 billion in mortgage-backed securities and government bonds. He purchased them with digital currency credits created out of thin air. The purpose was to bail out the big banks on Wall Street.

Pro-QE, anti-QT

By March 2009, Bernanke had increased the Fed’s balance sheet from $900 billion to $1.75 trillion. And over the next five years, he increased that amount to $4.5 trillion. Meanwhile, he stroked his ego by claiming he was preventing a repeat of the Great Depression.

Didn’t Bernanke think of his market interventions like Benjamin Strong? coup whiskey Was it preventing much-needed financial liquidation and asset repricing in the 1920s? Or is it that his actions are further distorting the economy and creating a bigger crisis?

Perhaps Bernanke knew exactly what he was doing. Remember, the Federal Reserve works in the interests of the big banks and big money on Wall Street. Not the little guy on Main Street.

And when the day came to set things right, Bernanke left the building. Janet Yellen, the current Treasury secretary and Federal Reserve chair from 2014 to 2018, was tasked with shrinking the Fed’s $4.5 trillion balance sheet eight years after the Great Recession officially ended.

Jamie Dimon is afraid of QT. He is a big banker. He is for QE and against QT. Similar to his 2022 recommendations. “cheer up,” Dimon advised caution in 2017. Speaking at a conference in Paris on Tuesday 11 July 2017, Dimon said That:

“There has never been QE like this before, and there has never been this kind of unwinding. Obviously that will tell you about the risks it could mean. Because we have never lived with such risk before.

“If it (QT) occurs in scale or substance, it may be a little more disruptive than people think. “We act like we know exactly what’s going to happen, but we don’t.”

But don’t be afraid. Yellen had a master plan…

Yellen’s colossal failure

On Wednesday, September 20, 2017, as the Fed was preparing for QT, Federal Reserve Chair Janet Yellen sought to clarify how the Fed would proceed with QT. Following the two-day FOMC meeting, the Federal Reserve made its customary announcement. name.

It was mentioned that balance sheet normalization would begin in October of that year. referenced Implementation Notes The Federal Reserve explained how it will shrink its balance sheet.

“Since October 2017, the committee has [Open Market] A desk that defers at auction principal payments on more than $6 billion of Treasury holdings that mature each month and reinvests principal payments in agency mortgage-backed securities held by the Federal Reserve in debt and agency mortgage-backed securities received each month. This exceeds $4 billion.”

Moreover, the Federal Reserve Annex to the June 2017 Policy Normalization Principles and PlanIt confirmed plans to shrink the initial $10 billion balance sheet (e.g., $6 billion in Treasuries and $4 billion in mortgage-backed securities) by $10 billion every three months to reach $50 billion per month. I then planned to ride until it got back to normal. But it wasn’t clear what normal was.

According to napkin calculations at the time, the cuts would begin by an initial $10 billion in October 2017, gradually reducing by $10 billion each quarter until they reach $50 billion, and then by $50 billion each month thereafter. It took the Fed 78 months to get its balance sheet back to the $900 billion level (i.e. roughly where it was before Bernanke’s dirty deeds). Therefore, monetary policy will have returned to normal in March 2024.

At least that was Yellen’s master plan. But Yellen’s master plan was a colossal failure.

Today the Fed’s balance sheet is about $7.7 trillion, not $900 billion. And we all live in the chaos this has brought.

Fed’s QT Taper Talks Already Behind the 8 Ball

QT ended and reversed abruptly in September 2019, after just 24 months, leaving the Fed’s balance sheet at $3.7 trillion. Initially, the Fed’s reversal was triggered to provide the liquidity needed to cover the repo madness.

If you remember, the overnight repurchase agreement (Repo) interest rate hit 10% between the night of September 16, 2019 and the morning of September 17, 2019. Short-term liquidity markets have essentially collapsed. Soon the Federal Reserve was supplying hundreds of billions of dollars of credit every night to keep credit flowing.

Soon after, this situation was rescued by coronavirus panic QE. This is where the Fed hit a wall and expanded its balance sheet by $5 trillion. A significant portion of this occurred between March and June 2020.

But Fed Chair Powell is much smarter than Yellen. He uses his sixth sense to predict whether he will have enough reserves or not enough. Preventing a repeat of repo madness would be forcing the Fed to scale back and ultimately terminate QT. Here we return to the Wall Street Journal:

“While the Fed expects to cut short-term interest rates this year because inflation has fallen, the reason for reducing bond outflows is to prevent disruption to a little-known but important part of financial markets.

“Five years ago, a balance sheet leak triggered upheaval in that market and led to a chaotic U-turn. “The authorities are determined never to do something like that again,” he said.

In other words, the Fed is trying to change course before a financial panic like what happened in September 2019 occurs. But is the Fed misreading the timing of the coming liquidity crisis?

“The generals are always ready to fight the last war.” It refers to the enduring axiom of conflicting attributions.

The surveillance policy order has changed dramatically over the past five years. For example, March marks the end of the Federal Reserve’s Bank Term Financing Program (BTFP). This, coupled with the rapid depletion of reserves, means that the Fed’s QT reduction plan is already behind the 8th.

And another liquidity crisis of the Fed’s own making will soon be upon us.

[Editor’s note: You may not know this.  But economic recessions are the best time to get rich.  >> Here’s how.]

thank you,

minnesota gordon
for economic prism

The Fed’s return to QT taper talks is already behind the eight balls in the economic prism.