Inquiring minds are monitoring the Fed’s Balance Sheet.

click on chart for sharper image

One more week like this and the FED balance sheet will be $1 trillion more than last year at this time. Currently now at $980 billion with this past week adding $20 billion.

Breakdown From Year Ago

  • Total Credit: +980.711 Billion to $3.796 Trillion
  • US Treasuries: +448.877 Billion to $2.106 Trillion
  • Mortgage Backed Securities: +525.072 Billion to $1.401 Trillion

Of US treasuries, the Fed added (and holds) precisely $0 in short-term bills.
Of US Treasuries, the Fed added 16 Billion in Inflation Indexed notes

Obviously inflation is not a concern to the Fed. Bank profits are.

Excess Reserves

The Fed is pumping money into the economy at at rate of $85 billion a month. Banks cannot use the money and are not lending it. The money piles up as excess reserves and the Fed (taxpayers) pays interest on excess reserves.

Nonetheless, the Fed has a clever idea! It proposes a new tool to pay banks even more interest on money banks don’t lend and cannot use (as an alternative to shrinking money supply).

New Tools!

With little fanfare or analysis by mainstream media as to what is really happening, Bloomberg reports Fed Gets Bigger in Markets as QE Prompts New Tools.

The Federal Reserve is getting more involved in debt markets as it tries to compensate for the impact of its almost $4 trillion balance sheet on short-term interest rates.

Policy makers are testing a new tool intended to improve their control of near-term borrowing costs. The facility would allow banks, broker-dealers, money-market funds and some government-sponsored enterprises to lend the Fed unlimited amounts of cash overnight at a fixed rate in exchange for borrowing Treasuries in so-called reverse repo transactions.

The facility is the latest innovation from a central bank that has participated on an unprecedented scale in U.S. debt markets since the credit crisis began in 2007. It’s designed to help policy makers — buying $85 billion of bonds a month — siphon off excess cash in the banking system when they begin to tighten policy. Three rounds of so-called quantitative easing have enlarged the Fed’s balance sheet to almost $3.8 trillion.

The new tool — called the fixed-rate, full-allotment overnight reverse repo facility — also is aimed at helping Fed officials address distortions in the market caused by their securities purchases.

“It will serve to put whatever floor they want under rates,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “You’re providing pretty broad-based access to Fed balances as an investment option.”

While the Fed gained the ability in 2008 to pay interest on cash it holds in the form of excess bank reserves, that tool has limited effect in anchoring borrowing costs because only banks could park their funds at the central bank, Crandall said. By now offering to pay a fixed rate to a wider range of counterparties for their cash overnight, policy makers should be able to improve their control of near-term rates, he said.

“By offering a new, essentially risk-free investment, one would expect that anyone with access to such a facility would generally be unwilling to lend instead to someone else” at a lower rate, New York Fed President William C. Dudley said in a speech in New York Sept. 23.

Where Does It End?

From the Bloomberg article, one person sees things correctly. …

With “the amount of bonds that have been piling up on the Fed’s System Open Market Account” there “has been a collateral shortage,” said Jim Bianco, president of Bianco Research LLC in Chicago. “What worries me about the Fed is that in reacting to the fact that their actions have created an unintended consequence in a free market, instead of saying ‘Oh, maybe we ought to re-think these actions,’ their answer is ‘No, we’ll go manipulate that problem now.’ Where does this end?” 

Mike “Mish” Shedlock