The Fed is talking taper. But it seems to be having a hard time actually tapering. The central bank added another $100 billion to its balance sheet in January.
In the calendar year 2021, federal tax revenues surged by an incredible 25% compared to 2020 and were up 22.8% over 2019 (pre-COVID). But the surge in tax revenues was not enough to overcome a record $6.8 trillion in spending, breaking the spending record set in 2020 by 1.6%.
While on the surface, it appears the Federal Reserve asset purchase taper has started, it’s not as easy to prove when you dig into the details.
The Fed is certainly not being as aggressive as they promised, and for good reason. As the Fed leaves the bond market, who will fill the gap? Since 2019, the Fed has quadrupled the Treasury purchases of international holders and has been one of the biggest players in the Treasury market.
Taper? What taper?
Last week, the Fed announced that it plans to speed up the pace of its asset purchase taper. But so far, this taper hasn’t been very impressive. Between Dec. 8 and Dec. 15, the Fed added another 92.1 billion to its balance sheet, expanding it to a record $8.757 trillion.
The Federal Reserve has slightly slowed its asset purchases over the last few months. Was this a trial mini-taper?
If so, the results are not good news for the central bankers over at the Fed.
The Fed balance sheet stands at $8.56 trillion. That’s up by $108 billion from the prior month-end, but down over the past week by $8.7 billion. The chart below shows how the Fed Balance sheet has grown by instrument over the last 18 months.
The Fed balance sheet stands at $8.33 trillion, up $111 billion from the prior month-end.
The chart below shows how the Fed Balance sheet has grown by instrument over the last 18 months. The major surge from COVID can be clearly seen as $2.5T was added within 2 months. The monthly changes since then reflect QE on autopilot.
The Federal Reserve has three primary tools to conduct Monetary Policy: reserve requirements, the discount rate, and open market operations (Quantitative Easing). Open market operations are how the Fed uses its balance sheet to provide liquidity to the market. More details can be found here. The Fed defines Open Market Operations as:
For months, the markets have anticipated the Fed tightening monetary policy in order to take on rising inflation. At the June FOMC meeting, the central bank even hinted that it might start raising interest rates in 2023 instead of 2024, and the central bankers apparently talked about talking about tapering their quantitative easing bond-buying program. But with all of this talk, the loose monetary policy driving inflation continues unabated. Interest rates remain pegged at zero. The Fed balance sheet sets new records week after week. Where exactly is the exit door?
Last week, Janet Yellen announced the Federal Reserve will begin the much anticipated “tapering” of its massive balance sheet. The Fed chair also hinted another interest rate hike is in the works. After the most recent FOMC meeting, we raised the question: Is this a viable path forward, or is the central bank playing a game of monetary chicken? Peter Schiff has argued that the Fed ultimately won’t be able to reduce its balance sheet to any significant extent. So, despite the Fed’s hawkish stance, the path forward seems far from certain.
In a recent article published on the Mises Fed Watch, Tho Bishop also raised some poignant questions about how the Fed will actually move forward with monetary policy.
