/ world today news/ The main question is what will happen to the financial system if the balance sheet of the Federal Reserve is shortened? They plan to start at 47.5 billion from 1 June 2022, then 63.5 billion from 1 July, 79.5 billion from 1 August and 95 billion from 1 September.
Thus, from June 1 to August 31, the Federal Reserve will reduce the balance by $190.5 billion. What will happen next? The Federal Reserve themselves do not know.
Is it a lot or a little? From March 1, 2020 (before the coronavirus monetary frenzy) to May 18, 2022, the Federal Reserve’s balance sheet grew by 4.65 trillion (Treasury +3.29 trillion and MBS +1.36 trillion) , repo transactions decreased by $143 billion, and loans to financial and non-financial institutions increased by $59 billion. The primary channel for providing $4.57 trillion worth of liquidity to the Federal Reserve System is through securities repurchases. The reduction of the balance in the summer implies a withdrawal of only 4.1% of the introduced.
However, the reduction of net liquidity in the system continues for half a year, and this reduction amounts to almost 600 billion dollars (due to the actions of US bonds in the market), which became one of the reasons for the collapse of the stock market by 20%
May to September is quite a difficult time in the context of the need for loans. For example, from May 1 to August 31, 2018, the federal budget deficit was 513 billion, in 2019 for the same period 536 billion, in 2020 1.52 trillion, in 2021 779 billion. In 2022 the deficit of the federal budget of 650 billion is expected for the specified period.
At that time, the Federal Reserve will dump $190 billion into the market while non-residents dump the Treasuries market, selling for the month by $100 billion. The reason is the increasing toxicity of dollar investments, the record negative real interest rates of the government budget and the need to cover its own cash gaps.
The main suppliers of capital to the US are Europe and Japan are running record trade deficits due to rising commodity prices and shrinking exports, while curbing their own quantitative easing.
Let me remind you that Europe and Japan bought back US securities, the buyback was a permanent current account surplus and their own asset buyback programs. Quantitative easing was closed and the current account reset and gradually entered a sustainable deficit along the commodity growth trajectory.
No support from the Federal Reserve and sales will begin, no support from non-residents and sales are already underway. Therefore, in addition to covering the 600-700 billion deficit from May to September, the US Treasury and the US financial system will have to somehow balance the sales by the Federal Reserve and non-residents. Who Will Save the Treasuries?
The US Treasury, anticipating when there will be a lack of liquidity, has accumulated almost $900 billion in cash. Therefore, they will balance the liquidity gaps by reducing the cash from the Federal Reserve accounts, therefore, the 3-month Fed sales of $190 billion will be fully covered by the US Treasury’s monetary position management.
So to answer the question, what happens if the Federal Reserve’s balance sheet shrinks from June 1 to August 31? Nothing will happen, the rate of reduction is negligible, the net liquidity in the system (Fed operations + US Treasury) may even increase if the Treasury reduces cash by more than 190 billion, which will definitely happen . According to my estimates, by the end of the year, cash may decrease by 450-500 billion. Therefore, the main operations will now be carried out not by the Federal Reserve, but by the US Treasury Department!
The main intrigue is not in the fictitious reduction of the balance sheet of the Federal Reserve (real liquidity in the system will not fall, but will increase due to the reduction of the monetary position of the Treasury), but in the growth of interest rates and the stability of zombie corporations. Now we are monitoring the tariffs – there may be problems.
Translation: V. Sergeev
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