Welcome to the financial crisis of 2023. We’ll find out how much we’ve learned since 2008.
Apparently the Federal Reserve has learned almost nothing, unless the people there are trying to cause economic chaos.
To be sure, most of the problems we have today are a result of previous Fed monetary policy. A lot of people are talking about the Fed’s hike of interest rates causing these bank problems. But the damage was done before that.
The Fed kept a mostly loose monetary policy from 2008 until 2022. The hike in rates over the last year was just to get interest rates somewhere close to normal. The Fed was essentially forced to hike rates because price inflation was getting out of control.
Now the Fed is left with the dilemma of fighting price inflation (that it caused) or bailing out the financial system. So far, it is trying to have it both ways.
The Balance Sheet Pivot Has Begun
Take a look at this chart of the Fed’s balance sheet. This one is updated on Wednesdays.
https://fred.stlouisfed.org/series/RESPPANWW
The total assets have gone up by about $300 billion from where it was a couple of weeks ago. This completely contradicts previous FOMC statements where they are supposed to be draining off assets by not rolling over some maturing assets.
To put it simply, the Fed is back to monetary inflation. Yet, it is still anticipated that the Fed could hike its target rate by 25 basis points next week. Any talk of 50 basis points is out the window now.
It would not be at all surprising if the Fed doesn’t hike rates at all in the next meeting or for the rest of the year. But it is interesting that it could possibly hike its target rate while simultaneously engaging in more monetary inflation.
This is perhaps one area where the Fed has indeed learned something. It has learned new tricks in deceiving the public.
Watching the Next Statement
The Fed is set to release its next monetary policy statement on March 22, 2023. Everyone will be talking about interest rates as usual.
Let’s see if the statement says anything about the Fed’s balance sheet. This is the base money supply. This is ultimately what determines the purchasing power of our dollars.
Peter Schiff has been predicting higher price inflation. He thinks the numbers have only come down temporarily, and they haven’t come down all that much.
I have had my doubts. I keep saying that if we hit a hard recession, then consumer demand will go down and we may see the rate of price inflation come down.
But we haven’t even officially hit a recession yet and the Fed is already creating new money out of thin air. Does anyone really believe this is a one-time bailout?
I have been saying that the Fed will keep a tight money policy, but that there are a couple of exceptions to this rule. To quote a post I wrote from February 1, 2023, “The Fed will not reverse course until price inflation is way down or until the bond market or major financial institutions need bailing out.”
Well, we are now at the point of bailing out major financial institutions. The major depositors at Silicon Valley Bank are getting bailed out. The rest of the banking sector is getting bailed out by the Fed’s messaging that it will intervene.
I’m not sure what number of quantitative easing we are on now, going back to 2008. Maybe this is QE5.
You can call it whatever you want, but the Fed is back in monetary inflation mode for now.