The Federal Reserve’s balance sheet grew by $300 billion in a week, leading to debate over whether these actions qualified as quantitative easing.
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The lender of last resort
Just days after the Silicon Valley Bank fallout and the establishment of the Bank Term Funding Program (BTFP), there was a significant increase in the Federal Reserve’s balance sheet after a full year of declines via quantitative tightening (QT ). PTSD resulting from extensive quantitative easing (QE) has many people sounding the alarm, but the shifts in the Fed’s balance sheet are much more nuanced than another regime change in monetary policy. In absolute terms, this is the biggest increase in the balance sheet we’ve seen since March 2020 and in relative terms, it’s an outlier that’s getting everyone’s attention.
The key takeaway is that this is very different from the QE asset-buying frenzy and stimulative easy money with near-zero interest rates we’ve seen over the past decade. These are some banks that need liquidity in times of economic hardship and those banks that get short-term loans in an effort to cover deposits and repay loans quickly. This is not the outright purchase of securities to be kept on the Fed’s balance sheet indefinitely, but rather assets on the balance sheet that should be short-lived while pursuing QT policy.
Nevertheless, this is an expansion of the balance sheet and an increase in short-term liquidity – potentially just a “temporary” measure (yet to be determined). At the very least, these liquidity injections help institutions avoid becoming forced sellers of securities when they would otherwise be. Whether it is QE, pseudo QE or not QE is not the question. The system is once again showing its fragility and the government must intervene to prevent it from facing systemic risk. In the short term, assets that thrive on liquidity are rising, such as bitcoin and Nasdaq which rose at the same time.
This specific increase in the Fed’s balance sheet is due to an increase in short-term loans in the Fed’s discount window, loans to FDIC bridge banks for Silicon Valley Bank and Signature Bank, and the bank term funding program. Discount window loans were $152.8 billion, FDIC bridge bank loans were $142.8 billion, and BTFP loans were $11.9 billion for a total of over $300 billion. dollars.
The most alarming increase is in discount window lending, as this is a high-cost, last-resort liquidity option for banks to cover deposits. It was the largest discount window loan ever recorded. Banks using the window are kept anonymous because there is a legitimate stigma issue about who needs short-term cash.
This brings to mind recent memories of the emergency liquidity injection in 2019 and the Fed’s intervention in the repo market to stabilize liquidity demand and short-term lending activity. The repo market is a key method of day-to-day funding between banks and other institutions.
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The next FOMC meeting
The market is still expecting a 25 basis point rate hike at the FOMC meeting next week. Overall, the market turmoil so far has yet to prove that it is “breaking enough,” which would require an urgent pivot from central bankers.
On its way to bring inflation back to the 2% target, core CPI month-over-month continued to rise in February, while initial jobless claims and unemployment n haven’t moved much. Wage growth, particularly in the service sector, still remains quite strong at the 3-month annualized rate of 6% growth last month. Although down slightly, it is because of more unemployment that we will need to see more weakness in the labor market in order to significantly reduce wage growth.
We are probably far from the end of chaos and volatility this year, as each month has brought new levels of uncertainty to the market. This was the first sign that the system needed prompt intervention and action from the Federal Reserve. It probably won’t be the last in 2023.
This concludes the excerpt from a recent edition of Bitcoin Magazine PRO. Subscribe now to receive PRO articles straight to your inbox.
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