Back in 2018 the Federal Reserve started to run down its valance sheet out of concern that its asset pile had grown so large that the central bank was in danger of becoming the market for things like Treasuries and mortgage-backed assets. (For some of the dangers in that state see the Bank of Japan, which does “own” the market for government debt.) Over the next two years the Fed ran its assets down to $3.75 trillion from $4.4 trillion.
If you haven’t been paying attention, you might have missed the steady increase in the Fed’s holdings to a whopping $8.2 trillion in Treasury bonds and mortgage-backed assets.
And even though the Fed has begun to talk about winding down its schedule of bond and mortgage-backed-backed asset purchases from the current $120 billion, there’s no plan that I can see to reduce the size of the Fed’s asset holdings. As Bloomberg’s Lisa Abramowicz reported today, it looks like the Fed’s blanc sheet will continue to rise even after it starts to par down its monthly bond purchases. She cites Societe Generale’s Subadra Rajappa’s projection that the Fed could increase its asset holdings by another $1 trillion in the next 12 months. Steven Ricchiuto, chief U.S. economist at Mizuho Securities, she reports, expects the Fed to keep expanding its books at the pace of nominal gross domestic product, even after it stops its latest round of quantitative easing.
To me this sure looks like the Federal Reserve will make that $8 to $9 trillion balance sheet permanent.
Two years ago (and longer) sound money advocates worried that the Fed and the U.S. Treasury were headed down a path that would result in monetizing the U.S. debt. The government would never pay back what it owed.
The recovery from the 2020 Pandemic recession has obscured a big problem with the U.S. and global economies.
My worry is that there is something fundamentally wrong when year in and year out the Fed and the Treasury (and other central banks) have to create money and then helicopter it into the economy and financial system to generate GDP growth of only 2% to 3%.
And that, at the moment, this problem isn’t even on the market’s radar screen.
