Progress looks meaningless but it has started. Let’s step back and see how we got here.
Monthly Change in Securities Held Outright
We had an unprecedented surge in QE which the Fed intends to roll back, starting very slowly.
Monthly Change in Securities Held Outright Detail
I created the above charts after seeing this Tweet.
At a weekly level, MBS looks like a bowl of spaghetti. So I used monthly averages.
Mystery?
I fail to understand the mystery. QE goosed asset prices on the way up and QT rates to do the opposite.
The Fed added liquidity and artificially lowered mortgage rates. Now it’s taking some of that back albeit very slowly.
Fed Statement
On May 4, the Fed announced its QT Schedule.
- For Treasury securities, the cap will initially be set at $30 billion per calendar month and after three months will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.
- For agency debt and agency MBS, the cap will initially be set at $17.5 billion per calendar month and after three months will increase to $35 billion per month. The Desk will reinvest into agency MBS the amount of principal payments from SOMA holdings of agency debt and agency MBS received during each calendar month that exceeds the cap amount for that month.
Snails and Ants
Many people following various charts have complained the Fed is not shrinking its balance sheet.
It is. Slowly. The problem is that most treasuries mature mid-month, the rest at month-end. Week to week mortgages are extremely volatile.
I elected to watch monthly averages as a better measure of progress. QT rates to escalate soon from a snail’s pace to an ant’s pace.
Should the Fed move faster? I believe so.
The Fed certainly had no qualms about blasting trillions of dollars lickity-split.
I would not say that QT has lifted off in a “big way” but it has happened. But we used to get by with less than a trillion dollars in reserves. I doubt we ever see that level again.
Meanwhile the free money to banks rolls in.
Hooray, More Free Money
The Fed pays interest on all reserves. At the end of May, the total reserves were $3.318 trillion.
The Federal Reserve currently pays 1.65% interest on reserves IOR.
If the Fed hikes to the range of 2.25-2.50 percent as expected, then expect IOR to jump to 2.40%.
Q: On an annual basis, how much free money are we talking about?
A: 2.40 percent of $3.318 trillion is $79.63 billion!
Q: We are giving banks $79.63 billion in free money?
A: It’s a moving target.
The IOR keeps rising but the reserve balances keep declining.
That $79.63 billion reflects a hike that has not taken place yet. If the Fed keeps hiking at a pace that exceeds QT, then the amount will rise further. If not, the actual amount of free money will drop.
For further discussion, please see Reverse Repos Hit a New Record High of $2.33 Trillion: Plus a Q&A on Free Money!
This post originated at MishTalk.Com.
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Mish
Hope the banks preserve the $79B which is a preemptive bailout from the pending auto loan crisis they are about to see in the next two quarters.
I’m old and my neuron destruction outpaces creation
Bankrupt-u-Bernanke destroyed nonbank lending (where the
nonbanks/shadow banks shrank by $6.2 trillion, while the DFIs were unaffected,
expanding by $3.6 trillion). The 1966 Savings and Loan Credit Crunch (when the
term “credit crunch” was coined) is prima facie evidence. He mistakenly
thought that the GFC was a capital crunch (which destroyed $1 trillion in
demand deposits).
20-year high, the euro at a 20-year low, and emerging market currencies
spiraling into hyperinflation, capital continues to flee the periphery to the
US-dollar core. Central Banks are trapped. They can’t raise rates because it
explodes interest expense, kills businesses, increases currency cost for all the countries that sold dollar-based debt, and it doesn’t thwart inflation
because this inflation is driven by govt-caused shortages. Also, the govt is
the biggest borrower. Will they stop borrowing because the Fed raises rates? Of
course not, but it will increase their interest expense.
On the flip side, if the Fed
lowers rates, all of the funds that must invest in govt bonds, like Social
Security, pensions, and insurance companies will spiral faster into insolvency.
The solution is downsizing and
privatizing as much of govt as possible, imposing short term-limits, and
unleashing freedom to increase supply and entrepreneurs. We all know that
none of this will occur proactively, which means we must prepare to endure the
next 10 years, as govt’s pull out all stops to hold on to power, while their
ability to borrow to keep the natives subdued is vanishing with defaults and
increased borrowing risk. Expect the endless stream of “divide and conquer” distractions to cascade into a non-conventional war, which will of course will necessitate a draft and rationing.