While The Fed and its apologists (except for Jim Bullard [4]) remain firmly attached to the idea that it is the 'stock' (or absolute level) of Fed Assets that represents the amount of policy-easement and not the 'flow' (rate of change) [5], we have explained numerous times that this is complete rubbish [5]. With the Federal Reserve balance sheet hitting 6-month lows this week, we thought the following 4 pictures would paint more than a thousand words on why The Fed will need to restart the flow soon... or the game is up.
The quiet, subtle decline in the Federal Reserve's balance sheet continued in April. As of May 1st, Gavekal notes [6]the Fed's balance was at $4.47 trillion. While undoubtedly still incredibly large, the Fed's balance sheet is about $45 billion less than its peak level on January 16, 2015. Total assets at the Fed are back to levels last seen on October 17th. Total assets at the Fed have declined by nearly $29 billion over the past three months. On a rolling three-month basis, the Fed's balance sheet has been declining for the last two months.
[7]
And the three-month difference in total Fed assets has produced some interesting relationships since QE started. Below are some economic indicators that caught our eye...
[8]
[9]
[10]
[11]
All suggesting it is indeed the flow.. and not stock that has pumped everything... and now that it is officially in decline, Yellen is going to need to find an excuse to crank the flow once again...
Source: Gavekal [6]
