Power & Market

4 Months of QT Down

The Federal Reserve continues down the asset reduction path, but how long can it last? With various thoughts about the stock market, interest rates, recession, inflation, and possibly employment, the Fed has found itself in a race of few horses, where none can emerge as winner since there is no finish line.

Last month in the article: 3 Months of QT Down, we stopped on August 31 with the Fed’s total balance sheet standing at $8,826,093,000,000 ($8.26 trillion). Due to the timing of the weekly data release, as September 30 fell on a Friday, we’re looking at this Thursday’s data release, current to October 5.

Therefore:

  • On August 31 the US Treasury (UST) balance was $5,694,997,000,000. The balance on October 5 now stands at $5,633,926,000,000 for a decrease of roughly $61 billion.
  • On August 31 the Mortgage-Backed Security (MBS) balance was $2,709,288,000,000. The balance on October 5 now stands at $2,698,158,000,000 for decrease of roughly $11 billion.

After several months of official Quantitative Tightening, there are two things to notice. The UST balance has been declining. However, in the previous week as of September 28 the balance was $40 billion higher. It’s unclear which month the large decrease pertained to. Still, $61 billion is relatively large considering the monthly cap is only $60 billion. Whereas the MBS balance hasn’t moved by much, with $35billion as the monthly cap.

Naturally, past behavior does not indicate future performance. But when exactly will the Fed start reducing the trillion dollar mortgage balance on its books? There are now teenagers among us who might be curious why the Fed owns nearly $3 trillion of mortgage “assets,” which the Fed started buying before these teenagers were ever born, ostensibly to fight a housing crisis which evidently hasn’t been resolved yet.

No one can predict the hour of the crash or crisis, nor exactly what “the event” will be. Most likely there will be a bank or two who get into major trouble. Pay attention to headlines which will talk of the next “Lehman moment,” or something to that effect, like this headlines CNBC had earlier in the week:

Credit Suisse ‘may or may not’ be a Lehman moment but something is going to break…

These headlines should continue becoming more pronounced, until eventually we get the Lehman moment they’re all hoping for.

And while the Fed continues holding steady, not all central banks have. CNBC also shares what happened overseas when the Bank of England:

…was forced to intervene in the long-dated bond market after a steep sell-off of U.K. government bonds — known as “gilts” — threatened the country’s financial stability.

Notice the language we’ve become accustomed. Due to some type of market dysfunction, the central bank was “forced to intervene” in the market. Unfortunately, they don’t tell you the problem stems from prior intervention, or that more dysfunctions will arise after this new intervention.

With four months of official QT now over, look for more potential Lehman moments and more news about market failures which will be used as reasons for more intervention. So far the Fed has (somewhat) stuck to their game plan, but it’s a short term game plan at best. Whatever happens, it will certainly lead to more Fed intervention and a higher balance sheet.

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