Submitted by reader Don
This note contains an update on where Fed printing stands, how much is left, what the pace of purchases is, and when the program will stop. It also updates the Fed's balance sheet, and its inflationary impact. This update houses some very important developments, due to actions at the US Treasury in coordination with the Fed.
Needless to say, Fed monetization programs have been a huge source of liquidity for the marketplace. It remains to be seen what will happen when this program is over, but it seems fair to say that liquidity will dramatically contract.
There are a few main conclusions from this analysis:
- Treasury program: The $300B Treasury program is now basically over (source).
- Agency/MBS program: The $1.425 Agency/MBS program is about $1.18T finished, while purchases continue at a slightly slackened pace of approximately $90B per month. At this rate, the program will be effectively over and done with by the middle of February 2010. This has clear liquidity implications for the marketplace come that time.
- SFP reduction and $268B of net printing the past 2 months: The "SFP", a program through which the US Treasury issued debt for the Fed to spend to blunt the inflationary impact of Fed balance sheet expansion, has led to tremendous money printing the past 2 months. Since 9/23/09, we've seen the SFP reduced by $185B and Fed Assets *increased* by $83B. In effect, then, the past 2 months have witnessed $268B worth of net printing of money by the Federal Reserve, without so much as a peep from the MSM (source).
- Real economy printing flat: It is true that the amount of money that has worked its way into the Real Economy (net of excess reserves and SFP) has remained flat (source). However this is due to the fact that banks now have $1,046B of excess reserves deposited back at the Fed, on which they are earning a risk free return of 25 bps. More free money for the banks guys!
In summary, the past 2 months have witnessed a huge amount of money printing, and a dramatic increase in the risk free profits the banks are getting. Is anybody watching this? Does nobody care? With a sleight of hand, the Fed has effectively cheapened the value of our money considerably. The equivalent of a hat trick has allowed the Fed to monetize almost $300B of Treasury debt in the past 2 months.
As noted in "Our Deficits - A Clear and Present Danger" (HBA 11/18/09), the US has a very considerable debt issuance problem in 2010 and thereafter. Trying to covertly print money at the Fed is apparently the solution our Administration has come up with.
Foreign central banks, are you watching this? Does this make anyone a little nervous? We have a hole at the bottom of our "ship". The hole is still there. What's next?
Fed Monetization Programs
Below is a graph of Securities Held Outright by the Fed:
- We can see the Treasury program is essentially over and done with.
- We can see the Agency/MBS program continues apace, at a slightly slackened rate.
This is a graph of total Agency and Treasury purchases as of 9/9/09, from a 9/15/09 WSJ article (WSJ 9/15/09)
- Old utilization and rate of buying. The Agency program had gone through approximately $930B of the $1.45T capacity from March to September 2009, or about $155B per month.
- Incremental purchases. The Fed bought an additional $250B of Agencies b/w 9/9/09 and 11/18/09.
- New utilization and rate of buying. This suggests they have satisfied $1.18T of their Agency program, at a rate of approximately $90B per month the past few months. The pace has slackened a bit.
- Projected program end, triangulation. At a $90B / month pace, this program will hit its $1.425T capacity by 2/7/2010. This syncs up nicely with the 11/4/09 FOMC statement (FRB) which states an anticipated program end by Q1 2010 and a further slackening of pace in the coming months.
In other words, 2 months from now, things could get awfully interesting...
Fed Balance Sheet, Real Economic Printing, and Inflationary Effects
Below is a graph of Fed Assets, Excess Reserves, and the Treasury's SFP funding:
Below is a graph of total Fed Printing, and the amount of printing that has entered the real economy net of the increase in Excess Reserves and SFP funding:
Declining SFP: We are seeing what was described in a 9/17/09 WSJ article titled "Treasury to Shrink Financing Program" (source). This was the description of the Supplementary Financing Program or 'SFP' by the US Treasury, ironically on 9/17/08 (source).
SFP description: The SFP was supposed to blunt the inflationary impact of actions the Fed needed to take by having the US Treasury sell government securities which it then gives to the Fed to spend, instead of simply having the Fed print all of that money out of thin air.
WSJ description of SFP unwind: As noted in the article, the SFP was getting unwound to help the US Treasury plug its deficit:
The Treasury Department is expected to begin winding down a temporary program created at the height of the financial crisis to address a new problem -- the government's rapidly expanding debt.
According to people familiar with the matter, the step is being taken to help the Treasury avoid hitting the $12.1 trillion debt ceiling that was expected to be reached by mid-October. The decision could also be controversial, since the program was put in place to help blunt any inflationary impact from emergency actions taken by the Federal Reserve.
Fed B/S grew while SFP shrank - money printing. One would think, then, that this implies the Fed too is unwinding programs to scale itself down accordingly. Nope. In actuality, they have been *increasing* the size of their balance sheet. What we have seen since 9/23/09 is a reduction in the SFP from $200B to $15B, while the Fed has done nothing but increase Fed Assets from $2,125B to $2,208B. In other words, the SFP went down by $185B, while Fed Assets went up by $83B. In effect, the past 2 months have witnessed $268B worth of net printing of money by the Federal Reserve, without so much as a peep from the MSM.
It is true that the amount of money that has worked its way into the Real Economy has remained flat. However this is due to the fact that banks now have $1,046B of excess reserves deposited back at the Fed, on which they are earning a risk free return of 25 bps.
The past 2 months have witnessed a huge amount of money printing, and a dramatic increase in the risk free profits the banks are getting. Is anybody watching this? Does nobody care? With a sleight of hand, the Fed has effectively cheapened the value of our money considerably. The equivalent of a hat trick has allowed the Fed to monetize almost $300B of Treasury debt in the past 2 months.
Foreign central banks, are you watching this?
- This is a table showing a breakdown of bank reserves into categories, including Excess reserves. This is the weekly version of those data points.
- This is an overview of the Fed's assets. The rightmost column, "Total factors supplying reserve funds", is the total size of the Fed Balance Sheet.
- This is a table showing the Fed's funding sources weekly, starting December 18 2002. It shows the Supplementary Financing Program.
- Securities held outright - FRB