Ooops! The Fed Is 60 Years Ahead Of Schedule

Well, you could have seen this one coming. Another Fed-whisperer at the Wall Street Journal sent up a trial balloon this morning on behalf of the wizards behind the screen at the Eccles Building. They appear to be asking, “how’s about we take a powder on QT again, and scale back or even eliminate the $95 billion per month shrinkage of our elephantine balance sheet?”

Bond Selloff Might Force Fed to Rethink Shedding Assets: Long-term interest rates have shot much higher in not much time. The tens of billions of dollars of Treasurys and mortgages the Federal Reserve is effectively pushing onto the market can’t be helping. 

You don’t say!

Then again, maybe they should have thought about what is actually just a mild version of monetary cold turkey when they pumped up the Fed’s balance sheet by 10X at the peak a few months back. During the 180-month period after August 2008, in fact, they grew the Fed’s liabilities at a 18.5% annual rate, which, of course, is from another planet in terms of historical monetary policy thinking.

Nevertheless, now that they are attempting to normalize their balance sheet, these money-printing wizards are apparently finding that shrinkage at a low double-digit annual rate, as per the current $95 billion per month QT policy target, ain’t nearly so copacetic as expanding it at upwards of 20% per annum for 13 years running.

Alas, this obvious asymmetry does have some troublesome implications for long-run central bank policy. If one crisis or another periodically requires a spell of turbo-charged monetary growth but that the post-emergency cost of balance sheet normalization is too high to tolerate, then it would be only a matter of a few decades before the US economy was literally paved in fiat central bank credits.

We don’t have to speculate about how that would work out.

Federal Reserve Balance Sheet, August 2008 to September 2023

Still, the question recurs. Are they even conducting a “monetary policy” at all, or are these furious, sequential spells of money-printing something different altogether?