Steno Signals #25 - Stealth QE through the back door?• By AndreasStenoLarsen
Financial plumbing is more important than ever.. We can explain most of the moves in equities this year with a proxy of USD liquidity, but let's have a look at how we actually calculate USD liquidity and why various parts are moving.. Ultimately, I will look a bit ahead on inflation and the Fed for this week.. Enjoy!
The anchor - The size of Fed asset holdings
Since the Great Financial Crisis of '08, the Federal Reserve data show nothing but positive earnings in extra interest income for the central bank. This has much to do with its active role in the economic aftermath of the crisis. Since then its balance sheet has continuously expanded.
While most economists still in charge had yet to get acquainted with quantitative tightening and the practical effects of positive real rates and balance sheet tapering, J. Powell announced earlier this year that, in addition to raising policy rates, the Fed would trim its 'portfolio' as of 1st June 2022 with a max run-off of 95bn USDs per month. The ramifications of this policy change is now starting to surface on various balance sheet metrics..