Monday Musings on Monetization and Markets (or Fundamentals Don’t Matter, Liquidity Does)
In that spirit, I round back on the Federal Reserves balance sheet versus the curious case of excess reserves of the mega-banks. Last week I detailed that every time the Fed has ceased adding to its balance sheet or outright reduced, the outcome has been decidedly negative for asset prices (HERE). However, like everything, there is a little more to the story.
The chart below shows the rise in the Fed’s Treasury’s (blue line), Mortgage Backed Securities (red line), and rise plus fall of Bank Excess Reserves. What is so interesting is that bank excess reserves didn’t begin declining when the Fed’s Quantitative Tightening began, but immediately upon the conclusion of QE in late 2014. And excess reserves have already declined by $1.2 trillion while the Fed’s balance sheet has declined by “only” about $400 billion.
Now, if I were cynical, I’d say it’s almost like the Fed’s plan with the excess reserves was to use them like a sponge to soak up liquidity during QE and then continue releasing liquidity long after QE ended…and even well after QT was underway (actually, I’m quite cynical). The term for this is “monetization”, something the Fed said it would “never do”.
The chart below shows the massive rise in the Fed’s balance sheet (white line), bank excess reserves (black line), and the quantity of monetization (yellow line) floating in the system just waiting to be leveraged into 5x’s or 10x’s or perhaps even 20x’s that amount.
…click on the above link to read the rest of the article…
