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It should be common knowledge by now that the Fed has been inflating its balance sheet fairly quickly to combat the current banking crisis. As the chart below illustrates, the Fed has added a gargantuan sum on its balance sheet in March, resulting in an increase of $324 billion.
Figure 1: Monthly variation by instrument
It is important to understand what is driving the increase. The graph above groups together the increase in “Others”. A take a closer look at the balance sheet shows that the increase was driven by two main components under “Loans”:
- Main credit is a loan program offered to deposit-taking institutions whose financial situation is generally sound.
- Other credit extension which is the value of loans made by Federal Reserve banks that are not classified elsewhere on [the Fed’s] balance sheet.
So yes, as the Fed defines it, the balance sheet increase in March was not QE because it did not buy Treasuries. Ideally, these two different tools are short-term in nature. In fact, primary credit has fallen by $22 billion over the past week. However, it is not not QE and it’s definitely not QT.
Speaking of QT, the Fed still falls short of its targets. The table below details the movement for the month:
- MBS was cut by $25 billion, still below the $32.5 billion target. This keeps the Fed streak alive Never achieve their actual MBS goal
- Treasury bills also saw a reduction, but only by $34.8 billion. That’s about half the target amount
- The fall was mostly concentrated on the shorter end of the curve, with Treasuries maturing in less than a year. It should be noted that these are by far the most liquid and the easiest to sell.
Figure 2: Breakdown of the balance sheet
Weekly activity can be seen below, where the last week gives the impression that the crisis has passed. It’s more likely just the eye of the storm. There are many other weak banks that could come under pressure. THE commercial real estate market could also be the next trigger for the next escalation of this crisis. When something breaks next, expect another dramatic increase in the balance sheet.
Figure 3: Weekly changes in the Fed balance sheet
To understand what is causing all this turmoil, look no further than the bond market. The spike in interest rates is a massive departure from history and exposed the cracks in a market built on cheap/easy money.
Figure 4: Interest rates on all maturities
The yield curve is still inverted but has actually started to steepen. The inverted yield curve is the clearest sign of an impending recession, but the current steepening suggests that this crisis could be very different from that of 2008. Market participants could finally be anticipating the very real possibility of major stagflation .
Figure 5: Tracking the yield curve inversion
The chart below shows how the yield curve has fallen slightly over the past month. The curve has changed dramatically from what it was a year ago.
Figure 6: Tracking the inversion of the yield curve
The Fed suffers losses
The Fed recently racked up about $44 billion in total losses. This is motivated by two factors:
- Similar to SVB, she is selling assets (under QT) which are now worth less than when she bought them
- The interest paid to banks (4%+) is greater than the interest it receives from its balance sheet (2%)
When the Fed makes money, it sends it back to the Treasury. This brought in the treasury nearly $100 billion a year. This can be seen below.
Figure 7: Fed Payments to Treasury
You may notice in the chart above that 2023 is showing $0. That’s because the Fed is losing money this year. According to the Fed:
Federal Reserve Banks remit residual net profits to the US Treasury after covering operating costs…Positive amounts represent estimated weekly payments due to the US Treasury. Negative amounts represent the cumulative deferred asset position…the deferred asset is the amount of net profits the Federal Reserve Banks must make before remittances to the US Treasury resume.
Basically, when the Fed makes money, it gives it to the Treasury. When it loses money, it keeps a negative balance by printing the difference. This negative balance has just exceeded 44 billion dollars!
Figure 8: Funds transfers or negative balance
Note: These charts are a correction of previous articles that aggregated the Fed’s negative balance, exaggerating the losses.
Who will bridge the gap?
With the Fed out of the Treasuries market, who will fill the huge void? Bloomberg recently published a article this shows how typical Treasury buyers have all pulled out of the market. First and foremost, that includes the Fed, which has been the biggest buyer in the market for years. It also includes institutional investors and foreign countries.
As shown below, international holders have lost interest in the Treasury market. There has been a modest increase in recent months to $7.4T, but the total for foreign holders has not eclipsed the peak seen in November 2021 of $7.7T. This means that total foreign holdings of US debt have been flat or falling for almost 18 months.
Note: data was last published in January
Figure 9: International cardholders
The chart below shows how debt ownership has changed since 2015 for different borrowers. Total Chinese holdings have now fallen to $860 billion, the lowest since at least 2015.
Figure 10: Average weekly evolution of the balance sheet
Historical perspective
The final chart below provides a broader view of the balance sheet. It is clear to see how the use of the balance sheet has changed since the global financial crisis.
The last balance sheet reduction lasted almost two years in 2017-2019 but was on a smaller scale. The last contraction in the balance sheet lasted 12 months before the recent peak. The Fed argues that these measures are temporary, but even so, QT definitely slowed and the balance sheet expanded rapidly in March.
Figure 11: Historical balance sheet of the Fed
Wrap
Well, the Fed finally broke something, but Powell seemed adamant about downplaying that fact during his last press conference. The expansion of the balance sheet certainly indicates otherwise. The Fed is trying to buy time for the banks with its latest measure, but the system is breaking due to the Fed’s own actions. The economy is addicted to cheap and easy money, so any removal of monetary easing will run into problems.
THE decline in the money supply certainly shows that trouble is brewing. Sure, the Fed just injected $300 billion in new money, but that won’t be enough to stop this bubble from bursting. The Fed will have to do more if it wants to prevent things from collapsing.
Powell still talks tough, but this bluff is a harder sell due to the response to SVB’s collapse (OTC: SIVBQ) and Signature Bank (OTC:SBNY). The Fed could not have folded faster or harder than three weeks ago. The first sign of trouble and the Fed is dumping cheap money to keep things afloat. People need take note and see that this answer, more than anything else, proves that the Fed is totally bluffing and does not want to suffer economically.
If it’s not obvious yet, it will be over time. At this point, gold and silver will be much higher. It is best to load while prices are still below historical highs.
The data source: Assets: Total assets: Total assets (less consolidation eliminations): Wednesday level And Publication tables: Table 2. Distribution by maturity of securities, loans and certain other assets and liabilities
Data Update: Weekly, Thursdays at 4:30 p.m. (Eastern Time)
Last update: March 29, 2023
Interactive charts and graphs can always be found on the Explore Finances dashboard: https://exploringfinance.shinyapps.io/USDebt/
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.