If discussions about macroeconomics are still permitted here , I haven’t seen any discussion about this important development in recent months.
Seems like the Federal Reserve very quietly (sure it’s in their statement, but hardly anyone even noticed or apparently cares) lowered their level of QT significantly. The Fed balance sheet reached just short of $9T in April 2022 after the COVID emergency was declared over (pretty much). So in May '22, the Fed announced that it will start QT, ramp up agency debt (mostly MBS) from $17.5B/mo to $35B/mo, and ramp up treasury debt from $30B to $60B/mo. And they started their QT program in June '22. They didn’t quite reach their total of $95B/mo, but they did get close some months. In May '24, with their balance sheet still huge, they cut QT back to 35/25 (MBS/Treasury). Then for the rest of 2024, they averaged about $55B a month reduction of balance sheet. Nevertheless, by the end of 2024, the balance sheet was still about $7T. And this week, they’ve reduced it to $35/$5, or a total of $40B. At the $40B rate, it’ll take well over 100 years to shrink the balance sheet to a more normal one or two trillion. And this isn’t the first time they’ve stopped/slowed their QT program, the QT program after the GFC was also stopped/slowed after a few short months.
Basically, they are signaling to the world that they’ve given up on ever getting to a normal balance sheet level. That’s because they are already STARTING at a level of $6.7T BEFORE the next recession, and surely they will use their balance sheet as one of the tools to help ease the next recession. Along with political uncertainty, high levels of randomness in foreign policy, and threatened disengagement in world defense, this is perhaps another sign of the decreasing importance of the US on the world stage, and the slow decline of the US dollar being the world’s reserve currency. After all, if the Fed keeps allowing our money to be “diluted” each crisis, then eventually the dollar declines in value.
Personally, I don’t find it a reason to panic because this is a decision they can and will revisit at all future meetings.
Maybe once the uncertainty of tariffs has abated, they will resume. I also would rather they be cautious and do this than run the risk of having to increase rates - which I think would be worse than slowing the shrink of their balance sheet.
That is not how that works. The FED is like a snare drum on the economy. The interactions are counter intuitive.
More importantly the FED does not bailout recessions during the demand side period. That job belongs to fiscal policy. Which worries me.
I am beginning to tune into what you are saying. There are more dynamic reasons for what is happening than how you see things.
You posted a chart or responded the other day to a chart that shows the percentage of federal spending to GDP. You had everything wrong.
The spending is high because we deindustrialized with supply side economics.
We need a factory build out to right that. It is not a matter of cutting spending or separately of offering tax cuts. It is a matter of growing the GDP to make the country and economy stable.
This was discussed in the Q&A and Jay Po explained the rational behind it. It was noticed and discussed.
Your assumption of $1-$2 T reserves is normal is incorrect. The current money market, bank deposits and various other measures demand a higher reserve by Federal reserve.
One of the main reasons mentioned in yesterday call is they are seeing some liquidity issues in the market. Currently the reserves are ample but they are reducing the pace. He also further stated that while we are reducing the amount but it will “slower and longer”, and we are not
changing the target reduction.
Here is something that talks about the issue of QT
Let me further add, the treasury secretary initially said, he wanted to cut the bills (short term < 1 year) and issue more bonds, but once he assumed the office he changed the tune. Why? When you have $7 Trillion money market funds, you cannot drastically reduce the bills. It is going to take time.
The FED sees slowing inflation and slowing economy. Rates are going to come down.
The politics of this tax cut need to be owned by who actually issues the cut. No other entity needs to speak up right now.
Dealbook by David Ross Sorkin, note Powell that is the base case. He does not want to respond to the tax cut at this point.
But there is a silver lining, he said yesterday at a news conference. Tariff-driven inflation is likely to be “transitory” and just for this year. That’s the “base case,” he added, words that seemed to lift stocks. S&P 500 futures were climbing this morning as traders price in roughly two to three interest rate cuts this year.
They are waiting to see how bad it could get–and how long it will take to get there. So far, there are not a lot of tariffs except on steel and aluminum. April 2 will be the real beginning–IF they dare to start them. Then the tariffs on US exports will begin. More welfare to ag because they will lose that vote permanently if the farmers are not appropriately compensated for their losses caused by the choice to impose tariffs.
, I haven’t seen any discussion about this important development in recent months.