Did the Fed Forget to Start QT?

by Peter Schiff, Schiff Gold:

According to the Fed, Quantitative Tightening (QT) was set to begin in June. From Reuters:

“On June 1, it will start the process at $47.5 billion a month for the first three months, divided as $30 billion of Treasuries and $17.5 billion of MBS. It will increase to the full $95 billion three months later.”

Well, it looks like the Fed was unsuccessful in their first month of QT. The balance sheet contracted by less than $1B and even increased MBS holdings by $1.9B.

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Figure: 1 Monthly Change by Instrument

The table below details the movement for the month:

  • Treasuries shrunk by $5.5B for the month versus an expected $30B decline
  • MBS rose $1.9B versus an expected $17.5B decline
    • This increase happened even though MBS fell by $19.5B in the latest week

Figure: 2 Balance Sheet Breakdown

Looking at the weekly data shows little attempt by the Fed to shrink its balance sheet. May actually saw a bigger reduction than June! The Fed is not simply waiting for the securities to mature since they bought back 1-5 Maturities after seeing a decline mid-month.

Figure: 3 Fed Balance Sheet Weekly Changes

This is a very dramatic miss and continues to prove that the Fed is much more bark than bite. They can talk tough on inflation, but when it comes to actually following through, they are far less inclined.

Yes, the Fed has raised rates to 1.5%, but this is still far below the current rate of inflation. Furthermore, the Money Supply analysis shows that the Fed is not actually contracting the money supply, which would be required to bring down inflation. The slower growth will pop the stock, bond, and real estate markets, but will not successfully bring inflation back down.

The Fed is set to raise rates again at the next meeting. But each rate hike will take its toll on the economy, which brings the Fed one step closer to chickening out of its inflation fight.

One reason the Fed might be struggling to implement QT is the massive sell-off in the bond market shown below. The Fed would simply exacerbate the carnage if they became net sellers of Treasuries.

Figure: 4 Interest Rates Across Maturities

The yield curve is once again facing inversion which is the market pricing in a recession and a return to Fed bond buying. Any QT that does eventually occur will be quickly undone as soon as the full force of the recession hits. The Atlanta Fed is already indicating that a recession is underway, predicting a negative GDP growth for Q2.

Figure: 5 Tracking Yield Curve Inversion

The chart below shows the entire yield curve compared to one year ago and one month ago. It is both higher and flatter than 30 days ago, and significantly higher than one year ago. The current curve is seeing inversions from 3 to 10 years. This has major implications for every aspect of the economy.

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