As the markets wait to see if Helicopter Ben is maybe about to treat them to a third round of QE, it’s interesting to note that the Fed’s balance sheet has been shrinking of late.
This morning’s The King Report raises the obvious question:
If QE 3.0 is imminent, why isn’t it expanding?
On August 29 the Fed’s balance sheet was $42.76bn lower than a year ago, according to the latest figures. And $12.94bn lower than the previous week. Looking at total factors supplying reserve funds, these are down $31.52bn from a year ago and $6.99bn from the previous week.
From Andy Lees at AML Macro, who points out that the balance sheet is $115bn smaller than it was on December 28 last year (emphasis ours):
Over that period it is down 4% which annualises at nearly a 6% contraction. Even since the end of June the balance sheet has contracted by USD51.06bn so the decline was not front loaded or anything like that.
Whilst the figures are not huge, and I’m sure there is some volatility in there, it does not seem indicative of the Fed about to launch a new bond buying programme.
A friendly source adds:
The suggestion from clients is that this is bonds rolling off quicker than the Fed is able to buy back, and that the contraction does not necessarily indicate that it is voluntary and the central bank is happy with this. Nevertheless they believe QE3 is unlikely although some do think extending the commitment to 2015 may happen.
They are also watching the spread of MBS vs Treasuries and think the QE would only happen if the spreads started to widen quickly.
We know none of this is going to stop you poring over every word of Bernanke’s speech later today, but worth noting nevertheless.
And this one time, at economist camp… – FT Alphaville
The unintended consequences of QE: not what you think – FT Alphaville