We wrote yesterday that we would be surprised if the Fed follows through on its stated plan to reduce its balance sheet by $95 billion per month as it seeks to unwind the heavy hand it played in 2020 and 2021 by subsidizing fiscal stimulus programs and executing its QE program.
Robust Fed balance sheet growth 2020 – 2022. The Fed’s balance sheet grew from $4.2 Trillion in February 2020 to $9.0 Trillion at its peak in April 2022 – an increase of 114% as the Fed subsidized everything under the sun.
QT? Not as far as the eye can see. So much for QT. Thus far the Fed has reduced its balance sheet from a high of $9.0 Trillion in April 2022 to $8.9 Trillion as of August 3rd.
What’s next? The Fed will continue to increase the Fed Funds Rate. However, QT is a more powerful tool for shrinking the money supply. Given the mixed earnings reports over the past several weeks, particularly as it relates to recent weak chip forecasts from companies such as NVDA and MU, and given two consecutive quarters of negative Real GDP and weak labor participation, we believe the Fed will hold off on QT, or at least dramatically slow the ramp (recall that the Fed was initially supposed to be at its $95 billion run rate by September).