{"id":16014,"date":"2017-09-23T06:06:48","date_gmt":"2017-09-23T06:06:48","guid":{"rendered":"http:\/\/thepatientinvestor.com\/?p=16014"},"modified":"2017-10-09T06:07:18","modified_gmt":"2017-10-09T06:07:18","slug":"the-big-shrink-commences","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2017\/09\/23\/the-big-shrink-commences\/","title":{"rendered":"The big shrink commences"},"content":{"rendered":"

“The Federal Reserve left its benchmark interest rate unchanged and said Wednesday that it would begin to withdraw some of the trillions of dollars that it invested in the US economy after the 2008 financial crisis.” ~ Binyamin Applebaum<\/p><\/blockquote>\n

The Federal Reserve balance sheet<\/a> ballooned in the last decade to current holdings of $2.5 trillion of US Treasury securities and $1.8 trillion of mortgage-backed securities.<\/p>\n

\"Hourly<\/p>\n

Fed total assets of $4.5 trillion (the red line on the above chart) does not give the full picture. Of the cash injected into the economy, $2.2 trillion found its way back to the Fed by way of excess reserves deposited by banks (the blue line). These deposits earn interest at the rate of 1.25% p.a., providing a secure return on surplus funds. What this means is that the net effect of the balance sheet expansion is the difference between the two lines, or $2.3 trillion.<\/p>\n

Even $2.3 trillion is a big number and any meaningful sale of securities by the Fed would contract the supply of money, tipping the economy into recession. So how does the Fed propose to manage “normalization of its balance sheet” without disrupting the economy?<\/p>\n

Firstly, the Fed does not intend to sell securities. It will simply decrease the “reinvestment of principal repayments it receives from securities held” according to its June 2017 Normalization Plan<\/a>.<\/p>\n

The amount withheld from reinvestment will commence at $10 billion per month ($6bn US Treasuries and $4bn MBS) and step up by $10 billion each quarter until it reaches a total of $50 billion per quarter.<\/p>\n

That means that $100 billion will be withheld in the first year and $200 billion in each year thereafter….”so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.”<\/p>\n

Second, the Fed will reduce the level of excess reserves by an appreciable amount in order to soften the impact of the first step. So a $100 billion reduction in investments may only result in a net reduction of say half that figure, after taking into account the decline in reserves.<\/p>\n

Third, the federal funds rate will remain the primary tool of monetary policy and will be used to fine tune monetary policy to fit economic conditions.<\/p>\n

It appears that the Fed will start quite tentatively, withholding only $30 billion in the first quarter, but the longer term targets seem ambitious.<\/p>\n

With currency in circulation now growing at an annual rate of $100 billion, even a $50 billion reduction in the first year (net of excess reserves) could leave a big hole.<\/p>\n

\"Currency<\/p>\n

This is bound to take some of the heat out of the stock market. The plus side is it may restore some sanity to market valuations, but any sudden moves could cause an overreaction.<\/p>\n

Added later: <\/p>\n

Even if we compare the reduction to the annual change in M1 money supply, it takes a big bite.<\/p>\n

\"M1<\/p>\n

M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.<\/p>\n","protected":false},"excerpt":{"rendered":"

“The Federal Reserve left its benchmark interest rate unchanged and said Wednesday that it would begin to withdraw some of the trillions of dollars that it invested in the US economy after the 2008 financial crisis.” ~ Binyamin Applebaum The Federal Reserve balance sheet ballooned in the last decade to current holdings of $2.5 trillion … <\/p>\n

Continue reading “The big shrink commences”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,34],"tags":[3763,1313,1358],"class_list":["post-16014","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-us-canada-countries-regions","tag-balance-sheet","tag-excess-reserves","tag-federal-reserve"],"yoast_head":"\nThe big shrink commences - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The big shrink commences - the patient investor\" \/>\n<meta property=\"og:description\" content=\"“The Federal Reserve left its benchmark interest rate unchanged and said Wednesday that it would begin to withdraw some of the trillions of dollars that it invested in the US economy after the 2008 financial crisis.” ~ Binyamin Applebaum The Federal Reserve balance sheet ballooned in the last decade to current holdings of $2.5 trillion … Continue reading "The big shrink commences"\" \/>\n<meta property=\"og:url\" content=\"https:\/\/thepatientinvestor.com\/index.php\/2017\/09\/23\/the-big-shrink-commences\/\" \/>\n<meta property=\"og:site_name\" content=\"the patient investor\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/profile.php?id=61572934660810\" \/>\n<meta property=\"article:author\" content=\"https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/\" \/>\n<meta property=\"article:published_time\" content=\"2017-09-23T06:06:48+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2017-10-09T06:07:18+00:00\" \/>\n<meta property=\"og:image\" content=\"http:\/\/static.incrediblecharts.com\/images\/2017\/2017-09-22-fed.png\" \/>\n<meta name=\"author\" content=\"Colin Twiggs\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Colin Twiggs\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2017\/09\/23\/the-big-shrink-commences\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2017\/09\/23\/the-big-shrink-commences\/\"},\"author\":{\"name\":\"Colin Twiggs\",\"@id\":\"https:\/\/thepatientinvestor.com\/#\/schema\/person\/d42b18d516a80149d739845749ac6454\"},\"headline\":\"The big shrink commences\",\"datePublished\":\"2017-09-23T06:06:48+00:00\",\"dateModified\":\"2017-10-09T06:07:18+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2017\/09\/23\/the-big-shrink-commences\/\"},\"wordCount\":541,\"publisher\":{\"@id\":\"https:\/\/thepatientinvestor.com\/#organization\"},\"image\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2017\/09\/23\/the-big-shrink-commences\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.incrediblecharts.com\/images\/2017\/2017-09-22-fed.png\",\"keywords\":[\"balance sheet\",\"excess reserves\",\"Federal Reserve\"],\"articleSection\":[\"Banks & Interest Rates\",\"US & Canada\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2017\/09\/23\/the-big-shrink-commences\/\",\"url\":\"https:\/\/thepatientinvestor.com\/index.php\/2017\/09\/23\/the-big-shrink-commences\/\",\"name\":\"The big shrink commences - 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He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-4ai","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":1375,"url":"https:\/\/thepatientinvestor.com\/index.php\/2011\/10\/17\/feds-kocherlakota-on-why-balance-sheet-expansion-need-not-be-inflationary-real-time-economics-wsj\/","url_meta":{"origin":16014,"position":0},"title":"Fed\u2019s Kocherlakota on Why Balance Sheet Expansion Need Not Be Inflationary – Real Time Economics – WSJ","author":"ColinTwiggs","date":"October 17, 2011","format":false,"excerpt":"I\u2019ve mentioned how the Federal Reserve has bought over $2 trillion of government securities. It has funded that purchase by tripling the amount of deposits held by banks with the Fed \u2014 what are called bank reserves. ....... Banks have few good lending opportunities, and so they\u2019re not trying to\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":11035,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/10\/01\/qe-the-end-is-nigh\/","url_meta":{"origin":16014,"position":1},"title":"QE: The end is nigh?","author":"ColinTwiggs","date":"October 1, 2014","format":false,"excerpt":"I have read a number of predictions recently as to how stocks will collapse into a bear market when quantitative easing ends. The red line on the graph below shows how the Fed expanded its balance sheet by $3.5 trillion between 2008 and 2014, injecting new money into the system\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Fed Assets and Excess Reserves on Deposit","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2014\/2014-10-01-fedassets-reserves.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2014\/2014-10-01-fedassets-reserves.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2014\/2014-10-01-fedassets-reserves.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":20003,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/03\/16\/fed-brings-out-the-big-bazooka\/","url_meta":{"origin":16014,"position":2},"title":"Fed brings out the big bazooka","author":"Colin Twiggs","date":"March 16, 2020","format":false,"excerpt":"The Fed is on a war footing. The FOMC announced that it will cut the funds rate to zero. Timing of the announcement \u2014 Sunday, March 15th at 5:00 p.m. \u2014 signals the level of urgency. \"Consistent with its statutory mandate, the [FOMC] Committee seeks to foster maximum employment and\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":14242,"url":"https:\/\/thepatientinvestor.com\/index.php\/2016\/09\/28\/fed-easing-continues\/","url_meta":{"origin":16014,"position":3},"title":"Fed easing continues","author":"ColinTwiggs","date":"September 28, 2016","format":false,"excerpt":"Quantitative easing (QE3) ended in the second half of 2014 after the Fed announced it would taper asset purchases in December 2013. The graph below shows that total assets leveled off at $4.5 trillion and have been maintained at that level since. But the graph also shows that the Fed\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":24526,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/03\/12\/treasury-yields-face-tga-slr-headwinds\/","url_meta":{"origin":16014,"position":4},"title":"Treasury yields face TGA\/SLR headwinds","author":"Colin Twiggs","date":"March 12, 2021","format":false,"excerpt":"10-Year Treasury yields eased slightly, to 1.53% on Thursday, with the real yield widening to -0.75% (1.53 - 2.28). February consumer price index came in at 1.68% increase over the past 12 months. Not as high as the 2.28% breakeven inflation rate but tracking upwards. Treasury General Account (TGA) Janet\u2026","rel":"","context":"In "US & Canada"","block_context":{"text":"US & Canada","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/us-canada-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":13216,"url":"https:\/\/thepatientinvestor.com\/index.php\/2016\/04\/28\/lighting-a-fuse\/","url_meta":{"origin":16014,"position":5},"title":"Lighting a fuse","author":"ColinTwiggs","date":"April 28, 2016","format":false,"excerpt":"The Fed quit quantitative easing more than a year ago, limiting total assets on its balance sheet to $4.5 trillion. But more than $2.5 trillion of cash injected into the financial system had been deposited straight back into the Federal Reserve system by banks as excess reserves, earning 0.25% p.a.\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Fed Total Assets and Excess Reserves","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2016\/2016-04-28-fedassets.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2016\/2016-04-28-fedassets.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2016\/2016-04-28-fedassets.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16014","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=16014"}],"version-history":[{"count":1,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16014\/revisions"}],"predecessor-version":[{"id":16015,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16014\/revisions\/16015"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=16014"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=16014"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=16014"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}