Slowing down.

After picking up its game a few weeks ago, the Fed has again slowed down its bond buying activities.

Fed buying peaked in June at $7.168 trillion, albeit, as of today it is some $112 billion lower.

Sounds like the Fed is snoozing.

Equally, banks have also decided to sit on the bench for an extended period. You might remember the Fed told banks they no longer had to keep base level reserves with it.

‘Go out and lend’ was what Fed Chair Powell said.

So, the only reserves left with the Fed now are ‘excess’ because base level reserves no longer exist. That’s why they are now simply called ‘Total reserves of depository institutions’. Here’s the new chart.

And no surprises there, they are still at extremely high levels, and recently increased.

Clearly, those banks are happy to earn small amounts of interest from the Fed on parked funds (whereas in Europe they have to pay the ECB for the privilege) rather than risk losing it on bad credits/potential zombies.

In the past week, an additional ~$80 billion has been parked with the Fed.

Remember that banking works in a fractional way. If we assume those reserves were lent out, the $2.8 trillion would have the capacity to create at least 10x that amount in real economy loans, so call it $28 trillion.

Looks like the banks are also snoozing.

Politicians are usually stuck in a re-run.

And now the politicians. These people are normally too busy with clandestine agendas to snooze, but in any event they’re dragging their feet on welfare-fiscal, and they haven;t even addressed growth-fiscal.

And as of last Friday, the U.S. House of Reps is in recess.

No deal has been reached with the Senate for additional welfare-fiscal. While a US$2.2 trillion package was supported by the House, House leader Pelosi is still far from home in selling it to Mnuchin, with the Republican controlled Senate wanting a hard stop at $2 trillion.

Last Friday, Pelosi admitted they were far away on unemployment insurance benefits, schools, state and local funding, a child tax credit, testing and tracing, and appropriations.

All of the above plus the news of the President and staff contracting COVID forced a sell-off in market moving tech shares, with NASDAQ down 2.8%. and the DOW down 0.5%.

A pause before the next battle.

Ultimately, because the Fed has painted itself into the ‘always on’ corner, more from the Fed and Treasury will be required for the following reasons:

1. Additional stimulant for COVID, with the economic recovery slowing (661,000 jobs in September, being the third month of slowing job growth).

2. Deficit currently $3.1 trillion and set to increase to potentially over $5 trillion depending on how much of the next welfare bill passes, and that will require new bond issuance. Call it $5 trillion, and unless interest rates are very attractive, the Fed will likely need to be the buyer. Or, more chimney money or debt monetisation from Treasury (send it down chimneys direct to families, bypassing the indirect bond market money expansion machine).

3. There is ~$155 trillion of unfunded liabilities in the U.S., including social security, medicare and entitlements, much of this being entitlements for retiring boomers, with no way to fund other than through new bond issuance.

So, to QE Infinity perhaps we need to now add Zero Interest Rate Infinity.

If that’s correct, who or what will buy all of those bonds?

Either the Fed will have to buy them under Powell’s Pandemic Put, i.e., Guarantee Infinity, or bond prices will need to be set at more attractive levels and rates go up.

But if yields go up, you know what comes down.

Stay tuned.

Mike.

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Image attributions: Disney.