The Fed's Choice: A Balance Sheet That Is $4.5 Trillion Or $5 Trillion... Or Much More

Tyler Durden's picture

Now that an October taper is out of the question, bored investors, in a world in which fundamentals no longer matter, are looking forward to the next possible FOMC meetings and potential taper announcement dates, with three specific dates sticking out: December/January, which are really one cluster, and June, as possible announcement dates. Why are these dates important: because while a September tapering announcement would have resulted in a $4 trillion final Fed balance sheet (assuming the tapering proceeded to a full QE halt) before even more QE was unleashed, any subsequent taper dates imply a nice round number to the final Fed balance sheet at the end of 2014: either $4.5 trillion, assuming a January 2014 taper, or $5 trillion if the Fed waits until June to announce a tapering.

This can be seen on the following chart from Bank of America.

BofA commentary:

Markets will be especially focused on the discussion around the timing and conditions of tapering. Our Chart of the day illustrates three scenarios, the first of which is a useful reference despite not actually happening: a September 2013 start to tapering that follows the June “framework” laid out by Chairman Ben Bernanke for a mid-2014 end to asset buying. In that case, the Fed’s asset holdings would have grown to around US$4tn. A January start and a slower pace of unwind results in nearly US$4.5tn in Fed assets, while a June start (and similar slow pace to conclude) yields nearly US$5tn. Those are sizable differences.

Another way of seeing the change in market expectations, is the following chart which shows what the current tapering path looks like.

There is of course an increasingly likely third possibility: forget $4.5 or $5 trillion - with increasing chatter of a Fed that is prepared to unleash NGDP targeting, or as it is better known without its technical term: even more turbo printing in an attempt to unanchor future 2% inflation expectations, the Fed's balance sheet may just grow forever and ever.

And with every passing day in which the Fed demonstrates a complete lack of concern about the collapsing pool of high quality collateral which the Fed monetizes at an ever faster daily net basis, this becomes the most probable outcome.

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FieldingMellish's picture

Untaper. $100B/month by March.

Manthong's picture

I’ll take “Much More” for 6 Trillion, Alex..

y3maxx's picture

Fed has the only American Debt that is "Repayable". Western Canada will be Annexed and all its foreign owned Natural Resources and Industry will be Nationalized by Amurika.

Thomas's picture

Top graphic seems to imply a cold-turkey untapering in spring. That will happen around April, 20...never.

banzai401's picture

Yep, in April Obama will take Cheney's dick out of his arse, ... yeh right, ...

insanelysane's picture

"Untaper. $100B/month by March."

Actually true since $100B in March will only be worth $75B as compared to the prior March.  FED will still insist there is no inflation while stating that they must untaper to counter a weakening dollar.

The sheeple consume what the are told.  Independent thought is work and must be avoided.  Please pass the iCrap with some of those Kardishpeeps on it.

Herd Redirection Committee's picture

"Trust the experts"

This politics, finance, economics, and history stuff is too complicated to be left to ordinary citizens to worry about.  Trust us.  Trust the experts.

Headbanger's picture

Nope.  Looking more like it's "taper on" according to the 10 year Treasury yield spiking higher:

Panafrican Funktron Robot's picture

It is erroneous to assume that the 10 year is spiking higher because tapering is likely.  It's more likely that the 10 year is spiking higher because of rapidly weakening demand.  QE is, in a nutshell, a publically funded program to prevent the collapse of derivatives that have a basis in the 10 year UST rate (read: most of the derivatives market).  Each basis point (1/100th of 1% for layman) is a $2 billion dollar move in the derivatives market.  There is some significant pain above the 2.5% rate on the 10 year (it's currently around 2.55%, was non-trivially higher during the last "taper talk" period).  There are very likely bank failures above the 3.0% rate.  The Fed will buy any/all UST's necessary to keep the 10 year at or below 3%.  This has not had the expected effect of increasing outside demand for UST's based on that Fed backstop, in fact, it has done the opposite, because the real (not nominal) value of a 10 year UST note at current yield is substantially negative.

To put it in a less technical way, we are in the early stages of hyperinflation as the world moves away from accepting the US dollar as the reserve currency of choice.  The international community is rapidly losing confidence in our fiat currency, and our domestic community has yet to really catch up with that reality.  Think Game of Thrones here: winter is coming, bitchez.

Herd Redirection Committee's picture

The domestic community doesn't even know the international community exists, or can have an impact on them!  Its going to be ugly, my question is, what disinfo will they offer up on the teevee?

Panafrican Funktron Robot's picture

The supply of sufficiently intelligent brown people living in poverty, who can be bought off to suicide themselves for a token payment, is virtually limitless. 

That said, there seems to be efforts more recently to demonize white males who aren't "with the program", so I wouldn't rule out a repeat of the McVeigh script, followed by a bump up in domestic surveillance (if that's even possible?) and further push towards "sustainability", ie., re-setting the perception that we deserve anything more than a cinder block apartment with a place to shit, sleep, and watch television, while eating our heavily modified/mass produced/poisionous "meals" so we die quicker and blow all of our remaining wealth on unnecessary medical treatments and devices.  I think anyone can see how incredibly well that's working. 

gjp's picture

That must be why gold and silver are down 3%-6% from pre-FOMC yesterday and stocks are down all of 0.5% max.  Makes sense.

Panafrican Funktron Robot's picture

Precious metals and other items of real, tangible value will remain muted in USD price as long as the Fed puts off the day of reckoning.  The scale of that day of reckoning increases with each passing delay.  View this as a gift that allows you to exchange pieces of paper/numbers in a computer system for all manner of items of real, tangible value (precious metals, weaponry, durable/sustainable food/water sourcing, practical skills training, etc.).


Ham-bone's picture

All it would take to return the Fed's balance sheet to it's pre-GFC of '08 of $500 B (primarily in T-bills) is 48 months of $100 billion selling / rolloff (assuming $5 T balance sheet in 2015 - this means that by 2019 the market is "back to normal")...sounds totally plausible.

Antifaschistische's picture

On a Balance Sheet is Assets which are 'balanced' by Liabilities and Owners Equity.    So...what's swelling on the right hand side of the "Balance Sheet."   is it a liability?   or is it Owners Equity.   And who is the real owner?   If the FED is swelling "equity" through QE then all they're doing is confiscating wealth through counterfeiting.   So, why would they have any incentive to stop that once the Sheeple have allowed it. 

Bam_Man's picture

The liabilities created by the QE asset purchases are "Excess Reserves". These are essentially "deposits" of Federal Reserve member banks.

all-priced-in's picture

When the FED prints up digital dollars and uses them to buy securities


The securities purchased show as an asset - the dollars put into circulation are booked as a liability.



Herd Redirection Committee's picture

For a long time I thought the 'transmission' mechanism for inflation would be, for one, the government, and secondly, when banks start lending.

Now, obviously we are still waiting for banks to start lending.  Now I don't think that will be the transmission mechanism.  The banks know lending the money, to small business owners or Jolene Sixpack's home reno, will result in inflation.  In the price of goods that those loans are used to buy. 

So the other option, if they aren't going to lend the reserves, is to use them to purchase assets (and equity stake) directly.  We see this on the stock market daily.  So in my opinion, the banks will buy up as much assets directly (as opposed to the more old school, "extend a loan, grab the collateral on bankruptcy method") as they can, and afterwards, the price of goods (provided by purchased asset) will get jacked up.

Moral of the story:  Now is  NOT a good time to sell income-producing assets to banksters.

Bearwagon's picture

I'm not an expert, but I think the money could at least partly be used to reduce the leverage of several shadow banks, too.

Panafrican Funktron Robot's picture

This is correct, hence the flow into excess reserves.  Cuts to loan-loss reserves that make up the bulk of reported "profits" are made possible by these deposit flows into the excess reserves bucket at the Fed.  This allows the banks to continue to crash (via deleveraging/write-offs/tightening lending) without actually crashing (via bankruptcy/takeover).  There is some token cash thrown at the stock market, but if that was really the primary flow recipient, it wouldn't be moving up 40% slower than the Fed's adjusted reserve base (ie., crashing 40% in real terms) since March 2009. 

Sutton's picture

Kidding,right? I'm dense. Sorry

Sutton's picture

Kidding,right? I'm dense. Sorry

pmbug's picture

QE to infinity?

Oldwood's picture

They are tapering now. Every dollar they create is worth less than the last one.

LawsofPhysics's picture

"They are defaulting now. Every dollar they create is worth less than the last one." -  FIXED


Doubleguns's picture

The defaulting started 17 trillion ago. We just have not figured out how big the default will actually end up being. 

LawsofPhysics's picture

Ignore all "price" in fiat.  Such liquidity/credit can be "fixed" in an instant with a few clicks of a keyboard.


With 7+ billion all competing for the finite resources and enery required for a better standard of living, there will be no escape from the coming calorie shortfall.  Unless you are living on 100% of what you produce in a secure location of course, and even then it might be a crapshoot with events like fukashima.

Manthong's picture

They are deflating now, every hour you work is worth less that the last one.

(FIXED for the 1%)

LawsofPhysics's picture

Bullshit.  The hard assets of my tribe/business continue to grow, just like the food we produce.

Deflation is a myth as no society/currency has collapsed/died because their purchasing power became too strong.

ignore all fiat, a fucking can of beans will have purchasing power when it comes time to raise an army from the starving masses.

The "debt is money" system of the earth is choking on it's own "success".

Bring it motherfuckers.

game theory's picture

If your hard assets are growing, why are you worried about inflation? In this environment, hard assets are growing faster in value than anything else.


LawsofPhysics's picture

I am not worried about any "flation", this the point (made-up words etc.).

liabitlites (most of which that aren't mine)?  Now that's another story...

LawsofPhysics's picture

What is the real "price" of something backed by nothing?

Tick tock motherfuckers...

Chupacabra-322's picture

Where's my free money? Oh ya, that's right. I'm not a part of The Global Criminal Oligarch Cabal Bankster Inteelligence Crime Syndicate.

banzai401's picture

The new game is completely clear,

Unless you can or are willing to declare ZERO INCOME

Your are fucked,...

Smart Guys will play along and declare 'zero income'.

gatorengineer's picture

or a minority or illegally here.

Bearwagon's picture

In a world in which fundamentals no longer matter - I tend to issue a stern warning to everyone who likes to listen to a bearwagon's thoughts. This could be regarded as a rant:

Each time I try to warn that we are in for a very bad surprise, I regularly get threatened and molested( not here at ZH). I get called a spinner, a crook or an idiot, a racketeer who wants to bar decent citizens from investing their hard earned money in the sole and last realm where any revenue is to be expected. I'm being "loved" in a quite burdensome way.
The Stalingrad & Poors 500 is at or in sight of the upper trend channel from two years ago. On daily basis it is clearly overbought, even so on a weekly basis. There is no hard relation between economic growth and capital gains. Recent data have mostly been dissatisfying (e.g. the european PMI). And risen interest rates at the capital markets won't do any good in this regard. Untaper and the ever rising avalanche of funny money are in no way an argument against a drastic correction.
Many quarterly financial statements have been disappointing. This fact just isn't widely recognized, because the bulls only watch exploding prices of stocks like Microsoft, Amazon or Google. Their rise in the market shows no relation to performance. This prompts the escalating foolishness of the bullish protagonists further.
The current sentiment shows that the number of such bulls is at a year's high. There's only a tiny fraction of neutrals, and the number of bears is decreasing. What seems to be positive, is in fact dangerous, because the "market" slowly but inevitably loses the buyers, all the more because there hasn't much profit-taking happened in the last two weeks (which would have had stabilized the trend).
According to my knowledge, a distribution of 80 % bulls, 20 % who regard a correction as possible and 0 % who think a trend reversal is possible, regularly marks the classic end of a trend, which is also true for the permanent upward correction of price aims which have long been reached without any real betterment.
I don't go so far as to predict a trend reversal, I just state that I see a massive need for a correction. This need for correction will, as logic as well as the history of stock markets show, not be satisfied with a comfortable lead time, but probably all of a sudden. A lot of people strongly disagree with me on this, and their argumentation is mostly the same ...
"Markets will keep rising, as long as rates are low, because there just is no alternative."
"The market does what it likes, so there never is a real boundary for rising prices."
"And, as I of all people should know, there never is a correction when you expect it."
Well, I don't want to sound all too precocious, after all I'm still a newbie. I'm only watching this show since the nineties, and not for 200 or 300 years, like some others who's knowledge clearly exceeds mine. And of course I am quite aware of my privilege as an author, to be mobbed by everyone.
Nonetheless, I'd like to raise a plea:

In the capital "markets" rates haven risen enough to not only impact growth negatively, but also to to offer an interesting alternative to a stock market which has risen very high (again).
The "market"does not what it likes to, but instead is itself nothing else than a projection of permanent shiftings between bullish and bearish participants. If there are exceptionally many bulls, they are already invested - otherwise they wouldn't be bullish. Sooner or later a point will be reached, from which on the demand begins to diminish. As long as the offers don't exceed the demand nothing is going to happen. But if the sentiment, which could hardly be better than now, tilts over, all of a sudden  very big offers will face nearly no ask. And that's exactly the point. If an index is overbought and profit takings are so low for weeks, that they can't even trigger any correction - then this can happen anytime.
A correction regularly doesn't occur when a majority of "market" participants expect it. But at the moment a majority of participants rule out a correction - which should speak for itself.
Same old, same old: If the bulls are in overwhelming majority, they not only feel safe, but also think they are right. But a lot of them are intelligent people, who know that the heaven is not full of promising stars, but shows lots and lots of warning signs. That's the reason they react very harsh to every person who dares to unrequestedly point out the drudgingly suppressed aspects. The more their depots are loaded with speculative crap, the more aggressive they become. The problem is, that the risks don't disappear, because they are ignored.
I have never claimed to know when or at what level the rise in the "market" will burst. Even under the current circumstances the S&P can go up further. Rising risk doesn't rule out a rise.
All I'm trying to say is that investors should be aware of risk and keep an eye open at night, instead of letting themselves be fooled by a false sense of "security". Those who know the real danger of the situation are willing and able to react resolutely and suddenly on time, when the rollover comes. That's necessary, because those who try to ignore the risks would react completely wrong, which means they would buy even moar, instead of heading for the exit.

edit: visualization, thanks to hugovanderbubble:

Element's picture



2007 = Buy very high

2008 = Sell very low + get huge public bailout

2009 = Congrats, you're a market-maker



2013 = Fear not, all is well.

Bearwagon's picture

Okay, I have to admit: I didn't think of that.

Herd Redirection Committee's picture

Bearwagon, if they devalue the currency at 10-15% annually, the S&P ain't gonna crash.

Bearwagon's picture

Absolutely correct. That is why I say that I don't know if it won't go up further. It can go up for quite a time (as long as they devalue the currency at 10-15% annually, for example), but one day, some day, one of these days ... it must come down. I clearly said I don't know when.

Hondo's picture

Not matter what the Fed thinks it has authority to do at some inflection point the "natural rights" of the citizen supercede what ever man written document implies.  A citizen has a natural right to protect the rewards of his labor and by all mean possible prevent the State from impoverishing him.  The Fed is fast approaching this limit.......

banzai401's picture

The 'fed' doesn't think, it knows the that USA public are a
a bunch of hairlip retards,...

The 'fed' knows they can do anything they wish, and there are an endless number of morons who will take helm to lead.

Where are they taking us is probably the better question,, places, but probably not places you want to go to,

Bryan's picture

I think they should just ramp up the printing and just keep on pumping money out until unemployment is 1% and inflation is around, oh let's say 4%.  If the percents don't happen right away, keep on pumping more and moar and MOAR.  Focus on the goal.  There, see I could be a Fed Prez too.  Their job is so easy.

SheepDog-One's picture

Well it's not really 'money' after all, it's just imaginary bullshit....and besides the Clowngress is busily passing laws that say they and the Fed can just ignore debts and such. I mean, these people ARE 'Masters of the Universe' ya know, and hardly suited to get mired down in oogie serf issues such as 'debts'.

greatbeard's picture

As long as they keep gold capped, what does it matter? Gold is an indicator of the health of the dollar and obviously the dollar is doing great.  You pillow biters need to get with the program and join the party.  Nobody likes a spoil sport.

Winston Churchill's picture

A trillion here,a trillion there.Suddenly you are talking real money,gold that is.

When the rest of the world decides they have enough gold and the US has none,the

fun will begin.

"Gold is money,everything else is credit".

Bearwagon's picture

Remember the golden rule: He who has the gold - makes the rules.