From Wall Street on Parade, February 15:
If you’re wondering why inflation is running hotter than it has in 40 years and why St. Louis Fed President James Bullard has broken with protocol and is openly criticizing the Fed on television for falling behind the curve on inflation, here’s a key part of that story.
The Fed’s Federal Open Market Committee (FOMC) made its first announcement that it would begin “tapering” the amount of its purchases of Treasurys and Mortgage-Backed Securities (MBS) on November 3 of last year. On that date, according to the Fed’s own H.4.1 filing, it held $8.063 trillion in debt securities. As of last Wednesday, that figure had risen to $8.395 trillion or an increase (not decrease) of $332 billion in the span of just three months.
The Fed’s practice of buying up debt securities from Wall Street firms in order to add cash (liquidity) to financial markets is called Quantitative Easing or QE, because it is a form of “easing,” not tightening, of credit conditions.
Most Americans understood the Fed to mean last November that it had stopped easing and was now tightening credit market conditions to address inflationary pressures that were taking root in the economy. Instead, the $332 billion in additional debt purchases actually represented the equivalent of a quarter-point cut in interest rates.
As Liz Ann Sonders, Chief Investment Strategist at Charles Schwab tweeted on February 11: “Important to remember that balance sheet shrink is also a form [of] tightening (approximate relationship is $300b of shrink = ~25bps hike)…”
Conversely, if you increase (rather than shrink) your balance sheet by $332 billion in new debt purchases, you’ve effectively eased by 25 basis points (bps), the equivalent of a quarter-point interest rate cut. (25 basis points equal one-quarter point.)...
....MUCH MORE
Also at Wall Street on Parade:
