Power & Market

7 Months of QT Down

Another month has passed, and the Federal Reserve has once again been able to shrink its balance sheet. It’s now 7 months since the official start of Quantitative Tightening (QT). As of last release, on Thursday, their balance sheet stood at $8.507 trillion.

The long-term chart reveals it’s much easier to expand the balance sheet than to shrink it, with stock market crashes and recessions typically following.

The Fed's 2022 year end balance sheet from FRED Data

The prior month’s article left off on November 30, when the balance sheet was over $75 billion higher. From Nov 30 to Jan 4, the US Treasuries (UST) balance decreased by roughly $58 billion and the Mortgage-Backed Securities (MBS) balance decreased by roughly $17 billion. (The reports come out every Thursday, so the time period is irregular).

Until we reach the inevitable conclusion of this Fed “tightening,” we will undoubtedly witness milestones and data points which we don’t see too often. Ryan McMaken wrote an article on the money supply and its recent move into negative growth. He noted that it is “not in itself an especially meaningful metric;” however, it does speak to the times we’re living in considering the last time this happened was 28 years ago. Look for new milestones to be hit as we continue along the path to a formal recession. Metrics such as how low the yield curve goes, for example, is a good one to watch.

In addition to economic data we must follow the headlines, like this one from CNBC, just at year end, to serve as a sign of things to come:

Stocks slipped on Friday to end a brutal 2022 with a whimper, as Wall Street wrapped up its worst year since 2008 on a sour note.

Of course, the Fed’s Monumental Monetary Tightening tends to have that effect on equities. And while the Fed can always print more money and may never technically become bankrupt, not every institution is as lucky. CNBC reminds us:

Bed Bath & Beyond warned Thursday it’s running out of cash and is considering bankruptcy.

Anyone holding Bed Bath & Beyond’s $1.2 billion in unsecured notes should be worried. To assuage reader’s fears, I checked the Fed’s Secondary Market Corporate Credit Facility (SMCCF) to see which corporate bonds America’s central bank held due to the COVID-19 crisis. The “SMCCF Transaction-specific Disclosures (XLSX)” document reveals the bonds previously held by the Fed:

Listing of corporate bonds the Fed held last year

(Note: The list above is from the last disclosure XLSX file on October 13, 2021, but on the January 11, 2021 file, the Fed held bonds of 557 different companies; this excludes all bond ETF holdings!).

Luckily Bed Bath and Beyond didn’t make the list. But why the Fed held bonds of Pfizer, Target, or Toyota… or any other multinational organization is knowledge in which we’ll never be privy.

In 2023, expect to see news headlines pile up as more companies inexplicably find that the sure bets they placed when credit was cheap and easy are not so certain anymore, now that credit is more expensive and harder to come by.

As a reminder, the continual problem (and inevitable conclusion) did not start when the Fed decided to tighten in 2022; rather, the foundation for failure was laid in 2020 when they chose to expand the balance sheet (again). It began with the $5 trillion money creation scheme, when the Fed intervened, buying bonds of Target instead of our once beloved, and possibly now defunct Bed Bath & Beyond.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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