The Fed’s actions with the money supply carry more economic weight than its actions with its Fed Funds rate. As far as QT is concerned, the Fed has already paused. Thus, whether the Fed raises rates tomorrow or in October or at all, the real story is that the Fed has put the brakes on QT. By the way, the money supply is growing again. We are easing. I would argue that we never really got tough with QT weak at best and a Fed Funds rate that barely got above reported CPI (yet never above real world inflation). Let’s see what Mr. Dove himself, Jerome Powell says tomorrow.
QT is essentially on hold. Over the past 4 weeks the Fed has trimmed its Treasury holdings by only $24.7 billion.
The money supply as measured by M2 needs to come back in balance in order to stabilize the economy. The only way to accomplish this critical task is for the Fed to rid its balance sheet of the excesses of 2020, 2021 and early 2022 when it grew the balance sheet from $4.2 Trillion in January 2020 to a peak of $9.0 Trillion in May 2022.
The Fed has only trimmed $1.0 Trillion from its balance sheet since it kicked off QT in May 2022. That is the equivalent of standing still. The reason why equities are overvalued across the board, the reason why houses are overpriced, the reason why kids are not showing up to work, the reason why I sound like Ben Graham is because of the excess $5.0 Trillion that was unnecessarily pumped into the economy from 2020 through today through various fiscal and monetary “Covid Relief” nanny state handouts including various Fed credit facilities, Fed ETF purchases, QE, stimulus checks, ERC, a Federal Student loan pause and the like that saw capital go to households, mom & pop businesses, CRE funds, PE firms, ETF funds, BlackRock, Apple and everyone in between while the Government told everyone to stay home (don’t go to work, don’t open your business for customers, wear a mask, take a shot). If only we suggested that the elderly and the infirm shelter in place if they felt unsafe rather than shut the economy down and print money. Trump was almost as big a Socialist as is Joe Biden and a bigger Socialist than FDR when it comes to fiscal policy (Where is Calvin Coolidge when you need him?) Now we are living with the excess in the form of inflated valuations that are detached from the fundamentals.
The only way the economy does not get ugly soon is if more stimulus checks come out of this looming debt deal between the Dems and the GOP. This will be a massive fiscal spending deal as we lifted the debt ceiling. My guess is that we will be looking at a $2-3 Trillion deficit in fiscal 2024 which kicks off on October 1st. We will be looking at $50 Trillion in debt by 2030. A little over 6 years from now Treasury Debt to GDP will approach 2.0x. We will cut Social Security before we cut military spending. We will cut Medicare before we cut Pharma subsidies. It gets a whole lot worse before it gets better. What most people view as “better” is just a mirage. Stimulus checks do not make for a stronger economy nor does Universal Basic Income – but it is coming. Mark my words it is coming. We are turning into Western Europe complete with its shitty Socialist policies, shitty labor participation and shitty Government intervention. Labor Participation here in the U.S. is only slightly above 60%. Therefore, how is unemployment only 3-4%? Government numbers are just as subversive as its fiscal policies.