The Fed has not removed liquidity from the system despite Powell’s rhetoric. A consistent QT program that removed significant liquidity from the system each month would have been far more effective in the battle against inflation and general excess than the Fed’s arbitrary lifting of its Fed Funds Rate. As Bank reserve balances have moved, so too has the S&P 500.

Take for example the Fed’s balance sheet which is displayed in the 1st chart:

• Excess liquidity: The Fed’s balance sheet has barely changed since the Fed started its QT program at the end of Q1 2022. The Fed grew its balance sheet from $4.2 Trillion in February 2020 to $9.0 Trillion in March 2022. Today, the Fed’s balance sheet sits at $8.4 Trillion, only 7% below its peak.

• Weak QT effort: QT is extremely weak in comparison to the Fed’s QE program when it was purchasing $120 billion in Treasuries and MBS each month. By comparison, the Fed’s biggest QT month was only $82.4 billion, and the average QT month is approximately a $58 billion balance sheet reduction. Not enough to undo what’s been done.

---

The S&P 500 and Liquidity:

• The first of the two below charts depicts the year-over-year percentage change in bank reserves held at the Fed (blue line) vs. the percentage change in the S&P 500 (green line).

• The second of the two below charts depicts the level of bank reserves held at the Fed (blue line) vs. the S&P 500 (green line).

• So goes liquidity, so goes the S&P 500.

---

• Asset Management
• Economy
• Financial Services
• Fintech
• Investing