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Powell Put Confirmed: Balance Sheet Reduction Will End This Year

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After weeks of hinting, Federal Reserve Chairman Jerome Powell confirmed that the central bank will end its balance sheet reduction program this year. This just five months after insisting quantitative tightening was on “autopilot.”

“We’ve worked out, I think, the framework of a plan that we hope to be able to announce soon that will light the way all the way to the end of balance sheet normalization,” Powell said during testimony before the House Financial Services Committee.

Powell said the central bank would be in a position to “to stop runoff later this year.”

According to the Fed chair, the balance sheet will remain at about 16 to 17% of GDP. That would mean the new normal for the Federal Reserve balance sheet would come in at between $3.2 trillion and $3.4 trillion. In other words, almost all of the mortgages and Treasurys that the Fed purchased at part of its three rounds of quantitative easing during the Great Recession will remain on its balance sheet.

As Peter Schiff talked about in a recent podcast, when Ben Bernanke launched QE, he insisted the Fed was not monetizing debt. He said the difference between debt monetization and the Fed’s policy was that the central bank was not providing a permanent source of financing. He said the Treasurys would only remain on the Fed’s balance sheet temporarily. He assured Congress that once the crisis was over, the Federal Reserve would sell the bonds it bought during the emergency.

Not so much.

According to a Reuters report, the current Fed board began hammering out a new balance sheet approach in November. That coincides with the plunge of the US stock markets in the fourth quarter of last year. It’s astonishing how quickly the Fed moved from “autopilot” to “we’re done” once the markets started to tank.

In his latest podcast, Peter Schiff talked about Powell’s testimony on Capitol Hill. He noted that Powell continued to harp on this theme of “patience,” reiterating that the Fed wasn’t in any hurry to resume, pushing interest rates up. But that raises a question: why patience now? Why not patience in December? What’s changed?

The only difference is the market hadn’t completely collapsed. In fact, at the last meeting, the Fed was not only not patient, they were hiking rates. They were interested in hiking rates more. But they have the quantitative tightening program, the shrinking of the balance sheet that was on autopilot. Why did they take it off autopilot? And not only did they take it off autopilot, but why are they saying they are going to wind it down so that we finish the reduction this year? ,,, Well, the only thing that changed is the stock market. They clearly came to the rescue of the stock market.”

Peter reiterated this really should come as no surprise. This was inevitable from the beginning.

This is not some new information that just happened and now all of a sudden a Fed that was going to bring interest rates back up to normal because something happened they had to stop. I was saying from the beginning that they were going to stop. I just didn’t know what the excuse was going to be. But eventually, they would come up with one because I knew that they could not complete the journey. But they were able to fake it as long as the markets were giving them the thumbs-up. But the minute the market gave them the thumbs down, well, then they had to call it off. The same thing with the balance sheet. When they said this autopilot, the markets were tanking on a balance sheet reduction plan going on autopilot, and so they had to call it off.”

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