The Federal Reserve Banks have reduced their total assets by half a trillion since April, down from $8.96 trillion to $8.47 trillion.
That’s the biggest contraction ever in absolute terms, but percentage wise the 5.5% reduction is the biggest since 2018.
Back then Fed reduced their balance sheet from $4.38 trillion in April 2018 to $4 trillion in January 2019, a close to 10% contraction.
Fed is currently selling $95 billion worth of assets a month, mostly Treasuries but also corporate bonds.
“If the Fed’s balance sheet continues to shrink at its current rate, it will drop by more than 13% this year” says Meetkumar Patel of Cheddar Flow, a data company.
Just how long Fed can keep that up is unclear as ten year Treasury yields have risen to 3.5% following some liquidity crunches last year.
That has contributed to a debate over the debt ceiling, with the Biden administration stating they will not prioritize interest rate payments if the debt ceiling is not raised.
That means the US would default, something markets consider unlikely but this Fed balance sheet reduction is having ripple effects.
In prior Fed board meetings there have been no indications whatever that they plan to slow down, with Fed keeping up the pace in 2018 until August 2019.
That coincides with current speculations of a change of course this summer, yet the 2019 change of direction was in part due to significant pressure from the then US president Donald Trump who even threatened to fire Fed’s chair Jerome Powell.
The current president Joe Biden is unlikely to get involved in any such spat, and has actually not made any comment whatever regarding Fed policy.
If Fed will continue this time beyond summer is therefore unclear, with it engaging in aggressive monetary tightening in 2018 despite inflation back then being very under control at 2%-3%.
Currently it is running at 6.5% for December, though most expect it to fall much further especially as gas prices have crashed with such energy costs being the main contributor to the spike in inflation.
Fed is now to meet tomorrow to further decide policy. Markets expect a hike of 0.25%, but some might look to read the tea leafs in regards to the tone of the speech.
The European Central Bank and the Bank of England will also decide on interest rates this week, with all engaging in monetary tightening.
That means they’re burning money that they created from nothing by selling assets, which in this case are loans, with the act of selling being a ‘repayment,’ thus the capital is no longer money as such.
Through this process they manipulate prices, and right now they’re manipulating towards deflation, with it anyone’s guess whether they will then be able to manage that deflation as they have been unable to for the past 15 years.