By Cory
The Fed’s Quantitative Tightening – Much ado about nothing
Here is the latest piece from the Epoch Times. It is focused on the Fed’s continue chatter on tightening of the balance sheet. I know we have been talking a lot about central bank policy recently but the change in narrative this year if followed through with an actual tightening around the world could be the biggest thing in the past 9 years.
Click here to visit the Epoch Times website for some more great articles.
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The older a bull market gets, those who are paid to comment on it become more and more desperate for new things to say about it — a professionally pressing need which tends to split the pundits into two distinct camps, each equally one-eyed about whether prospects are good or bad.
Among them is a group of doomsayers who first peddled the line that loosening monetary policy has become ineffective; now they say that the central planners at the Federal Reserve (Fed) are about to set the whole temple crashing down by tightening monetary policy again.
Alas, they can’t point to serious interest rate rises yet, not when the Fed has so far only managed a paltry one percent upgrade in the Fed Funds Rate to 1.25 percent, still lower than annual consumer price inflation. Also, the fall in long-term yields and credit spreads means that financing terms are, if anything, easier than they were before the Fed began to tighten.
Beyond that, they say the Fed is about to reduce the size of its balance sheet and reverse the Quantitative Easing (QE) programs launched after the financial crisis.
Balance Sheet Dynamics
Given that the post-crisis quintupling of the Fed’s balance sheet to the present $4.5 trillion was the very essence of ‘quantitative easing’ — the process by which banks and zombie firms were rescued, borrowers favored at the expense of creditors, spendthrifts helped and savers hindered, capital allocation tainted and stock markets turbo-charged — how can the reversal of this process not cause financial destruction? In fact, it has already happened — without the ensuing destruction.
Here, it may surprise the reader to learn that the Fed stopped expanding its balance sheet a little over three years ago and that, notwithstanding this, the narrow money supply has grown by around $700 billion, and a broader measure of money in the banking system (M2) by about $2.4 trillion; personal income has risen by an eighth, and economy-wide spending by around 10 percent.
But the base on top of which all other money grows is composed of the reserves that banks hold at the Federal Reserve. They have fallen by roughly $600 billion, or by just over a fifth, without much of a fuss.
So, what gives? How has such a mighty change been effected and yet been almost entirely disregarded by market observers? There are three main reasons.
Regulation and the Eurodollar
Firstly, we must point out that modern, advanced economy banking does not, in fact, operate via the classic reserve-multiplier mechanism on which this forecast relies, but rather on …read more
Source:: The Korelin Economics Report
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