Macro Monkey Says
More Fed BS
Super Bowl Sunday, the Moon Landing, Will Smith slapping Chris Rock at the Oscars, and the Fed’s balance sheet increasing: these are the moments that really get people talking, apparently.
At least, that’s what the Finternet showed us this weekend. As you’ll notice in the chart below, the Fed’s balance sheet has expanded in recent weeks, gaining $297bn to a level of $8.63tn at the close of last week, the Central Bank’s largest asset base since November.
But wait a minute; isn’t the Fed trying to reduce its balance sheet? Yes, you’re right, apes; that is still the goal. Despite what dumb*ss catastrophists behind keyboards might be espousing, these dynamics aren’t necessarily mutually exclusive.
Well, I guess growing the balance sheet while trying to reduce it is, by definition, mutually exclusive, but it’s not what you think. JPow and the gang aren’t yoloing into random treasuries, MBSs, ABSs, and even ETFs again or anything, so let’s see wtf is going on.
Basically, there’s been a little bit of news lately around some banks for pasty virgins in the Bay Area called SVB or “Hipster Soy Capital” or something. Anyway, this trainwreck run by idiots sparked a mini-panic that has the whole world on the edge of its seat to see how far and wide the alleged contagion will spread. To stop the contagion as quickly and easily as we did with C-19, JPow and the homies stepped in.
Programs like the Bank Term Funding Program (BTFP) have been launched to give these naughty bankers some extra liquidity when they need it most. The program allows the Fed to offer up to 1-year loans to struggling banks with high-quality instruments like t-bills valued at par posted as collateral.
Moreover, the OG programs offered at the Fed for struggling banks have been used and abused at record rates recently as well. Thus far, only about $12bn has been put to work out of the BTFP. Meanwhile, the discount window has been popping off with all-time records.
Known as the lender of last resort, the discount window is part of the Fed’s normal toolkit, offering loans to banks at rates slightly higher than that on repo loans. Like trying in gym class, using the discount window carries a heavy stigma, although it’s actually not that bad.
Banks don’t like to use the discount window because it’s a sign that the bank in question couldn’t get funding from anywhere else and was forced to borrow at the discount window’s higher rate. The Fed hates the beef around the discount window because it makes banks do other sus sh*t instead, so as a result, many analysts see the wild upswing in the usage of this standing facility as a good thing.
Compared to the $112bn previous record set during the height of the GFC, the $153bn taken from this program last week smashed records and contributed the majority of the Fed’s balance sheet growth last week. That might not sound great, but it’s not like using this facility will lead to horrific outcomes. We want the banks to have the money they need, and using standard programs like the discount window is always preferred to taking funds from the “extraordinary measures” offered by things like the BTFP.
Honestly, the data suggests the BTFP wasn’t even needed. The discount window’s $53bn combined with the $143bn lent through the FDIC to new bridge banks look to be more than enough.
And the best part is the Fed can support the banking system in this way without abandoning its War on Inflation. Balance sheet expansion driven by increased lending, as opposed to JPow buying up treasuries and MBSs, isn’t a direct injection of liquidity into markets. It does expand liquidity but does so idiosyncratically and in a more controlled manner (allegedly).
So, as usual, the Twitter people freak out, and then anyone willing to spend more than 2 minutes to actually find out what is going on realizes that the freakout is similar to that of a candy-deprived toddler at the grocery store checkout. Then again, anything can happen.
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