The Fed’s balance sheet modestly expanded during the week ended November 9th – which explains why Treasury yields were flat to down along the yield curve over the same period. The Fed’s Treasury and Agency security holdings increased by a combined total of approximately $26 million over the past week ($25 million Treasury holdings increase and a $1 million Agency holdings increase). Our view is that so long as the Fed is raising rates into a weak economy, it ought to keep the money supply flat. If the economy were to fall into a deep recession/depression, the Fed ought to expand the money supply. We expect the Fed Funds Rate to move higher until the entire Treasury yield curve is in positive real rate territory.
Fed Balance Sheet – Treasuries: The Fed’s Treasury security holdings were approximately $25.0 million higher over the past week and $54.8 billion lower on a rolling 4-week total basis.
Fed Balance Sheet – Agencies: The Fed’s Government Agency security holdings were approximately $1.0 million higher over the past week and $19.6 billion lower on a rolling 4-week total basis.