Power & Market

The Fed Says It Fears “an Excessively Rapid Expansion of the Balance Sheet.”

The July 28–29 Fed committee meeting minutes were released Wednesday, giving us another glimpse into the careful deliberation of those working tirelessly at planning our daily lives.

The ten-person Board of Governors began with the financial conditions in the US, the performance of the stock market, and specific industries. Per the minutes:

Airline and hotel share prices declined sharply, and share prices of banks—which faced earnings pressures from large loan loss provisions and compressed net interest margins—continued to underperform.

No surprise; airline and hotels share prices declined under covid. Yet not one person inquired as to the importance of the stock market in relation to monetary policy. Considering the various market interventions by the Fed, it appears that it’s their job to ensure that the stock market always trends upward and crashes as seldom as possible; however nothing of the sort is mentioned in their mandate.

They continued with macro ideas and discussed GDP:

Total real government purchases appeared to have increased moderately, on balance, in the second quarter.

Whether this is a positive factor or not remains unclear due to the neutrality of the minutes. But GDP includes government expenditure. The more a government spends, the higher GDP goes. Since we are told increases to GDP are good, it stands to reason that government purchases are positive to the economy…according to the Fed. Of course, not one person in the room acknowledged that governments only have the ability to tax, borrow, or print, and perhaps it’s a good thing they didn’t make as many “purchases” using coercive or printing press technology.

As the minutes went on it was only a matter of time until we were given the usual:

in order to continue to support the flow of credit to households and businesses, it would be appropriate over the coming months for the Federal Reserve to increase its holdings of Treasury securities and agency residential mortgage-backed securities (RMBS) and CMBS at least at the current pace. These actions would be helpful in sustaining smooth market functioning…

How smoothly should the market function? It cannot be articulated with mere words. But we must trust that they will know it when they see it!

The highlight of the meeting occurred when yield curve targeting was mentioned and the participants noted the problem it would create, concluding that there is

the possibility of an excessively rapid expansion of the balance sheet and difficulties in the design and communication of the conditions under which such a policy would be terminated, especially in conjunction with forward guidance regarding the policy rate. In light of these concerns, many participants judged that yield caps and targets were not warranted in the current environment…

Yield curve control would create a commitment to an unlimited amount of money to be carried to its full extent. We can breath a sigh of relief that very little interest has been sparked in this arena, for now.

Ultimately, some of the most powerful bureaucrats in the world decided (with a unanimous vote) to release the final statement, carrying on with business as usual.

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