While They Talk About a Taper the Fed Pushes Balance Sheet to Another New Record
While there is a lot of talk about the Federal Reserve tapering its asset purchases, no such tapering is actually happening.
In the week ending Aug. 18, the Fed pushed its balance sheet to yet another record with the addition of another $85.4 billion in Treasuries and mortgage-backed securities. The balance sheet now stands at a record $8.34 trillion.
Since July 28, the Fed has added $121.13 billion to its balance sheet.
For all the talk, talk, talk about tightening, the central bank continues the same extraordinary monetary policy it launched at the beginning of the coronavirus pandemic. The Fed can talk about tapering all it wants. The markets can expect the Fed to give up its “transitory inflation” narrative and turn to tightening all they want. But the reality is extraordinary monetary policy continues unabated.
The Fed has doubled the size of its balance sheet since it launched QE infinity at the beginning of the pandemic. It stood at a mere $4.159 trillion on Feb 24, the cusp of the COVID-19 pandemic. The New York Fed projects the balance sheet will top $9 trillion before all is said and done. And that projection seems very conservative. Peter Schiff said even if the Fed does taper, the balance sheet will likely eclipse $10 trillion.
Last week, the Federal Reserve released the minutes from the July FOMC meeting. They revealed the central bankers are starting to talk about tapering. That means slowing down its asset purchases. But they aren’t talking about ending quantitative easing altogether. They aren’t really talking about tightening. They are simply considering a move to slightly less loose. The Fed will just inflate a little more slowly. It’s like a faucet running full speed into the bathtub. If you turn the knob halfway back, water is still running into the tub. It’s still going to fill up and overflow.
And we’re not even contemplating actually shrinking this massive balance sheet. That seems an impossible feat.
An LMAX analyst said the expanding balance sheet is the driving force behind the booming stock market and support for risk assets.
Of course, propped up US corporate earnings didn’t hurt anything either. Eighty-seven percent of companies beat expectations in terms of Q2 performance. But all of this is a function of the unprecedented liquidity pumped into markets over the past decade-plus.”
What happens when you pull out props? Things fall down. The moment the Fed announces substantive monetary tightening, the stock market will tank and corporate earnings will sag. We’ve seen this song and dance before.
The Fed balance grew from $898.6 billion in August 2008 to a peak of just over $4.5 trillion in Jan. 2015. The Fed didn’t get around to significantly shrinking the balance sheet until 2018. The central bankers claimed balance sheet reduction was on autopilot, but that didn’t last long. The balance sheet dipped to $3.76 trillion in late August of 2019. From there it took an upward trajectory. Although they didn’t call it quantitative easing, the Fed had already pivoted back to QE in 2019, long before coronavirus reared its ugly head. In the fall of that year, the stock market tanked. The over-indebted economy couldn’t even handle a modest move toward monetary policy normalization. Once the stock market threw its taper-tantrum, the Fed pivoted back toward loose monetary policy.
The monetary stimulus in the wake of the 2008 financial crisis pales in comparison to the amount of money pumped into the economy during the pandemic. If the Fed couldn’t normalize after 2008, how will it normalize today given that the balance sheet has doubled in size?
If history provides any indication, the notion of a serious pivot to monetary policy normalization is nothing but a fantasy. The Fed can talk about it as much as it wants. But as the saying goes, talk is cheap. What will the central bank be able to do?
As Schiff said in his podcast, what they’re talking about doing isn’t really tightening.
It’s slightly less ridiculously easy than what we have now? But going from completely ridiculously easy to slightly less completely ridiculously easy — how does that constitute tightening? Why is that a reason to buy dollars? Why is that a reason to sell gold? It’s not. Especially when you realize that any tightening today is going to be proceeded by loosening tomorrow, and the tightening simply lays the foundation for the next easing, which will be much bigger, even looser, than the last easing.”