Taps Coogan – March 17th, 2023
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Owing to the two facilities that the Fed has created to backstop depositors in the failed SVB and Signature banks and provide liquidity to other banks, the Fed’s balance sheet has jumped by a stunning $297 billion this week.
For some context, the cumulative reduction in the Fed’s balance sheet from the quantitative tightening (QT) program that started last Spring was $623 billion.
The chart below shows the Fed’s balance sheet growth since 1914. Since the Global Financial Crisis, the Fed’s balance sheet is up about 9,000% and the Fed’s balance sheet has more than doubled since 2020.
Zooming in a bit, we can see the Fed’s attempt to wind down its Covid era free-money bonanza. Of the $4.8 trillion of Covid related QE, the Fed managed to soak back up a paltry $623 billion before something broke.
The backstopping of depositors at SVB and Signature bank (depositor bailout if you prefer) and the creation of a liquidity facility for banks has already added back $297 billion, nearly half of the liquidity it drained through QT.
While the assets that the Fed has added back this week are not the Treasuries and Mortgage-Backed Securities that it has been shedding, they add to the monetary base and liquidity nonetheless.
It’s worth noting that the Fed has not announced an end to QT and so the balance sheet may shrink a bit more before the Fed throws in the towel. In any event, we have probably seen the low on the Fed’s balance sheet for this tightening cycle.
To this day, the Fed refuses to acknowledge a link between inflation and its decision to ‘print’ $4.8 trillion and encourage the federal government to hand it out helicopter-money style and then continuing to do that for an entire year after its favorite low-ball measure of inflation, PCE-core, had surpassed its 2% target. Go figure.