Something’s Rotten In Denmark – The ‘Fed’ Balance Sheet

Andy’s Notes: Let’s remember why the not-so-US Fed’s balance sheet go so big to begin with. It was buying worthless assets from its (owner) banks. It was in effect bailing them out. This prompts some pretty sensible questions that aren’t being asked. Are these assets suddenly valuable again? I wrote many years ago when the fed started buying non-performing MBS that Americans were making mortgage payments to the central bank; that the fed was, in fact, buying the country up – piece by piece. So who exactly is the fed now selling the country to? Ron Paul was correct as we all knew then and now his cries for first auditing then shutting down this unaccountable economic weapon of mass destruction should resonate more than ever. More importantly, as Jefferson wrote ‘first by inflation, then by deflation’..will wake up homeless on the continent their Fathers conquered. When the fed sells these assets it is pulling money out of the system. THAT is deflation. The result? Well gee, take a look at that nice market mini-crash. Do the math. It’s time to tank the bank. It’s time to end the ‘fed’.

Ironically, Snopes, the great hoax detector claims the Jefferson quote above to be fake. Better hold onto your books, ladies and gentlemen; the Internet cannot be trusted.

With activist central banks once again backstopping markets during the recent bear market scare, which prompted Fed Chair Powell to turn from a hawk to a “patient” dove in just a few weeks, markets, traders and economists have turned their attention to the biggest driver of risk, namely the Fed’s balance sheet, which after expanding for the better part of the past decade has been shrinking at an “autopilot” pace of roughly $36 billion per month ever since it hit its “peak shrinkage” in Q4 of 2018…


… and prompted a barrage of media coverage in recent days including the following:

It is therefore hardly a coincidence that just over a week ago, JPMorgan’s head quant Marko Kolanovic said that there is one chart that “traders tape to their screens, blogs and email chains”, namely the complete QT calendar consisting of past and projected Fed Balance sheet QT weekly periods, such as the one shown below courtesy of Nomura’s George Goncalves. The reason why this schedule matters, is because – whether due to a self-fulfilling prophecy or some other liquidity soaking market dynamic – on days when the Fed’s balance sheet shrinks whether due to Treasury or MBS maturity, think of it as a reverse POMO, risk assets are hit.


Adding fuel to the dovish fire was a Friday article in the WSJ which said the Fed is considering a quicker end to its balance sheet runoff which has caused so much market anxiety and volatility. According to the WSJ, Fed officials “are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight.” The article also added that “officials are still resolving details of their strategy and how to communicate it to the public” however, “with interest rate increases on hold, for now, planning for the bond portfolio could take center stage.”

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