The Fed reduced its balance sheet by $177 million last month. The majority of this was actually in Treasuries with less than 1-year maturity, totaling $102B. The next biggest reduction was in loans, totaling $40B.
The Fed is still bailing out banks.
The Bank Term Funding Program (BTFP) reached a new all-time high in April, suggesting that the banking crisis has not yet passed.
And while the aggregate balance sheet looks to be shrinking, the detailed data shows it is more complex than that.
By now it should be common knowledge that the Fed has blown up its balance sheet rather quickly to combat the current banking crisis. As the chart below illustrates, the Fed added a gargantuan sum to its balance sheet in March, netting an increase of $324B.
Over the past several months, Mike Maharrey and I have posted numerous articles that conclude the same way… the Fed is bluffing and when something breaks, they will fold. On every podcast, Mike has walked through exactly why this is inevitable. Back in September, I laid out the math that showed why the Fed would fold and laid out a series of risks that may cause such an event. One of those risks was “What if the financial markets freeze because there is a credit event somewhere?”.
The Federal Reserve came close but still fell short of its $95 billion per month balance sheet reduction target through the last full week in February. This means the Fed has fallen short in 8 of the last 9 months.
And with rising interest rates coupled with even this modest balance sheet reduction, the Fed is also bleeding money.
The Fed has a targeted balance sheet reduction of $95B a month. The Fed has failed to meet its target in 7 of the last 8 months with only an $81B reduction in January.
The Fed fell woefully short of meeting their $35B MBS target, seeing only $16.7B (less than 50% of the target). The Treasury target was met.
The Fed has a targeted balance sheet reduction of $95B a month. After reaching and exceeding this target last month, the Fed is back to undershooting.
This should not come as a surprise given the turmoil in the bond market this year and the lack of liquidity.
The Fed has talked a big game lately. Many people (including me) assumed the Fed would fold a long time ago. There is a very good reason — the Fed will crush the economy and the US Treasury with higher interest rates.
In reality, the Fed is holding a losing hand and trying to bluff its way to victory.
Is the Federal Reserve worried about the tanking mortgage and housing market? If their holdings of mortgage-backed securities (MBS) are any indication, the answer is, yes.
The Fed has finally started shrinking its overall balance sheet as promised, but they are not shedding MBS according to plan.
According to the seasonally adjusted data, M2 increased by $23B in May. Except for the contraction last month (the first contraction in 12 years), it was the smallest monthly increase in M2 since the start of COVID.
