The Federal Reserve’s balance sheet increased by $300 billion in a week, leading to debate over whether these measures qualify as quantitative easing.
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Just days after the impact from Silicon Valley Bank and the establishment of the Bank Term Funding Program (BTFP), the Federal Reserve’s balance sheet has plunged significantly after a year of declines due to Quantitative Tightening (QT). rose. PTSD from massive quantitative easing (QE) has sounded alarm bells for many, but changes in the Fed’s balance sheet are much more subtle than a new regime shift in monetary policy. In absolute terms, this is the largest balance sheet increase since March 2020, and in relative terms it is an outlier that everyone is watching.
The key point is that this is very different from the stimulating easy money near zero interest rates and quantitative easing with massive asset purchases of the past decade. This concerns some banks that need liquidity during times of financial hardship and those that obtain short-term loans with the aim of covering deposits and paying off loans quickly. It is a balance sheet asset that should be kept alive in the short term while the QT policy continues, rather than outright purchasing securities held on the balance sheet indefinitely from the Federal Reserve.
That said, this is an expansion of the balance sheet and increased liquidity in the short term and may only be a ‘temporary’ measure (to be determined). At the very least, these liquidity injections help prevent institutions from becoming forced sellers of securities. It doesn’t matter if it’s QE, pseudo-QE, or non-QE. The system is showing vulnerability again and governments need to intervene to avoid facing systemic risk. In the short term, more assets thrive on liquidity, just as Bitcoin and the Nasdaq rose at exactly the same time.
This particular increase in the Fed’s balance sheet is due to an increase in short-term loans across the Fed’s discount window, loans to Silicon Valley banks and undersigned banks to FDIC bridge banks, and the banks’ term funding programs. Discount window loans totaled $152.8 billion, FDIC bridge bank loans $142.8 billion, and BTFP loans $11.9 billion, totaling over $300 billion.
A more alarming increase is discount window lending, as it is a last resort for banks to cover deposits and a high-cost liquidity option. This was the largest discount window borrowing on record. Banks using windows are anonymized because there is a legitimate stigma issue with finding people in need of short-term liquidity.
This brings back memories of the emergency liquidity injection of 2019 and the recent Fed intervention in the repo market to stabilize cash demand and short-term lending activity. The repo market is an important overnight financing method between banks and other institutions.
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The market is still expecting a 25 bps rate hike at next week’s FOMC meeting. Overall, the market turmoil to date has yet to prove “breaking enough” to require an urgent reorientation by central banks.
Core CPI still rose m/m in February on the road to returning inflation to the 2% target, but first unemployment claims and the unemployment rate were weaker. Wage growth, particularly in the service sector, remains fairly strong, with 6% annualized growth over the last three months. Rising unemployment, albeit slightly declining, is where we should see more weakness in the labor market to bring down wage growth significantly.
With each month bringing a new level of uncertainty to the market, it seems we are far from the end of this year of turmoil and volatility. This was the first indication that the system needed Federal Reserve intervention and swift action. 2023 won’t be the last.
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