Historic Federal Reserve lending to banks in the wake of Silicon Valley Bank’s collapse punched a huge hole in its effort to shrink the size of its balance sheet. | Reuters
Evercore ISI analysts pointed to the seeming contradiction of an expanded balance sheet driven by financial stability concerns happening as monetary policy tightens, and noted there is “rarely a perfect separation between financial stability and monetary policy goals. Messy real world policymaking needs to embrace this.”Fed numbers showed the speed of the shift to a new balance sheet reality.
The details of Fed holdings matters greatly in terms of understanding Fed balance sheet dynamics, analysts say.Benson Durham, head of global policy at Piper Sandler, said the key is the composition and not the size of Fed holdings. Emergency borrowing has driven up the overall level of Fed holdings, but the Fed continues to shed bonds and cut the level of reserves in the banking system, which is how the QT process has worked all along, he said.
There’s even a case for how some of the underlying factors driving banks to borrow Fed cash point to the tighter financial conditions the central bank has sought to control inflation, and which could hamper growth.
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