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Federal Reserve Hesitates on QE Unwind / Balance Sheet Reduction

Federal Reserve balance sheet reduction not happening yet even as the Fed applauds its own success

Is the Federal Reserve’s Great Unwind already coming unwound? I thought it would be good to check up on Federal Reserve balance sheet reduction since the Fed is supposed to be up and running on the move out of quantitative easing this month. It should be fascinating to see what progress the Fed is making as it happily applauds its own successful recovery.

 

 

The Federal Reserve balance sheet reduction that didn’t happen

 

By Kikuyu3 (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Is balance sheet reduction the Fed’s Gordian knot?

After all, the Federal Reserve’s End of Quantitative Easing Didn’t Happen last time they said it would. It turned out the Fed actually planned to continue QE at a gradual level by reinvesting matured assets. Nevertheless, the mere announcement in 2013 that it would terminate QE in 2014 created the infamous “Taper Tantrum.” The Fed hadn’t said anything back then that I was able to find about reinvesting the funds in its balance sheet until after they supposedly stopped QE in the fall of 2014. It turned out the stop was not a quite a full stop.

Unwinding its balance sheet is likely to prove to be the Fed’s Gordian knot.

 

Federal Reserve balance sheet reduction that didn’t happen … again … so far

 

So, here we are, and so far there is no reduction. It is now three years since the Fed “ended quantitative easing,” and its balance sheet is still holding around the $4.5 trillion mark where QE was supposed to end. Now that’s gradual! It’s taken three years just for the Fed to say it is going to start reducing the balance; so, let’s see how that balance sheet reduction is going for them now that it has supposedly started:

The Federal Reserve claimed it was going to start balance-sheet reduction in October at a rate of $10 billion per month and then start increasing that reduction in January by $10 billion per month until eventually it is unwinding at a rate of $50 billion a month, which will be the rate at which it plans to continue unwinding.

Here is how the Fed was doing in the first three weeks of its planned unwind:

 

Federal Reserve Balance Sheet Unwinding

 

Oops. Instead of reducing its balance sheet (unwinding quantitative easing) by $10 billion this month, The Federal Reserve actually increased it by $10 billion! Yikes! Did they find they needed to start QE back up as soon as they unwound $o.001 trillion?

After reading the above summary, I dug a little deeper to find the Fed’s latest October 26th release. It shows the balance back down to $4.460 trillion. Still oops. That’s right back to exactly where they started the month, and that is the final balance sheet release for October!

Now, it could just be that the Feds are moving accounts around and plan a $10 billion reduction on the last day of the month now that they know pretty well where the month stands. That would actually be the smart way to go about it. If that’s the case, that won’t show up until their next balance sheet release on November 2nd.

It could also be that the Feds have discovered they just can’t quite get started … again. Just like they haven’t been able to get started over the past three years! After all, there have been hurricanes that the federal government needs to fund. (There’s always something. Next time it may be new wars or catastrophic snow storms or an unprecedented bad holiday shopping season…. who knows? It’s a big country with endless big problems to fund.)

The final proof of the Fed’s ability to start unwinding will be in next week’s release when the last few days of October are all in. But if you wonder why the economy and the markets haven’t experienced any jog from the unwind so far, it’s because there hasn’t been any unwind so far; and the reduction that is planned (if it even happens) is a minuscule dose — a mere trial run — in order to test the waters.

Clearly, the Fed is moving with extreme caution … if at all. That tells you with certainty that even the Fed knows its balance sheet reduction is perilous. After all, the entire national economy has been “rebuilt” upon that balance sheet inflation.

Stay tuned. If the Federal Reserve’s balance sheet is not down by next Thursday’s balance sheet release, something has gone wrong with the plan. The time to watch is now.

 

  • Chris P

    Dave so much to write about with oil and the new Fed. I can almost hear your fingers typing…

  • Auldenemy

    I don’t think the, ‘Entire national economy has been “rebuilt”upon that balance sheet inflation’. I don’t think it has been, ‘Rebuilt’ at all, anymore than it has in the UK, EU, Japan or anywhere else where CBs have invented massive amounts of funny money out of thin air. What exactly has been, ‘Rebuilt’ in an America when its health system is now in a complete mess? How many of those millions of out sourced jobs have come back (the ones that used to provide a decent income, include health care and had a pension plan)? On the subject of pension plans, in many States they won’t be paying out on those pension plan promises. What part of the trillions invented by the Fed ended up helping with student loan debt? What part has gone into building affordable homes? Where are the decent wages for medium skilled workers since the Fed created gazillions of new dollars? It is clear that all that funny money was funnelled to the bankster lead Corporatocracy of the USA which is why the wealth divide in the USA has now reached obscene levels. Exactly the same has happened in the UK and EU (and no doubt Japan and China). How are our economies, ‘Rebuilt’ when post 2008 most have endured on going cut backs to public services (in the UK everything from our police, health care and council services have been cut to the bone since our wonderful parasites in government handed Banksterville endless billions and we got handed the bill).

    It seems to me that all QE has achieved is to make the parasitical elite on this planet ever richer and more powerful at the expense of the rest of us. QE means that far from being ‘Rebuilt’ our economies are now sinking in even more debt than the debt that came close to sinking us in 2008. If the Fed and other CBs think their vast money inventing operation has been a success then they are deluded fools. All the talk of, ‘Unwinding’ is exactly that, talk. The post 2008 monetary policy of the Fed (copied by so many other major nations) has simply created Frankenstein stock markets that will completely implode on any real CB tapering. CBs have invented stock market bulls that can’t be, ‘Allowed’ to crash because they are the icing surrounding a rotten cake (the rotten cake being the reality that our economies are at best stagnating and in some cases have never recovered from the bankster crash of 2008). CBs have invented a situation whereby the parasitical elites get to grow fat on the icing layer while Main St. gets to eat the rotten cake.

    • Indeed. “Rebuilt” is a term that needs a lot of qualifiers. As you know, I agree that rebuilt as it stands is a ramshackle affair of one-sided gains for the rich an nothing for the rest, who at best (and rarely) got jobs back almost matching the ones they had before the collapse, but in a multitude of cases got much worse jobs back. The point, though, wasn’t really the quality of the rebuild but the fact that whatever has been rebuilt rests on all that money and will come down as the money comes down.

  • John

    SITZKRIEG!!