Since February 3, 2021, the Federal Reserve has overseen the reserve balances held by commercial banks rise by over $740.0 billion.
Note, that this total is roughly 80 percent of what the total assets of the Federal Reserve just before the beginning of the Great Recession.
Note further, that around $560.0 billion of this flow came from the U.S. Treasury paying out to the public from its accounts at the Fed.
In other words, the fiscal stimulus created by the Biden administration is really hitting the pockets of the private sector and flowing into the banking system.
The Federal Reserve continued to buy securities during this time. In fact, the securities portfolio rose by a little more than $300.0 billion in this time period.
This increase, of course, is part of the Fed’s commitment to add $120.0 billion in securities bought outright to its portfolio every month. It is not letting up on its commitment.
Inflation
Federal Reserve officials continue to talk about their commitment to err on the side of monetary ease rather than risk a financial market setback, and to see inflation rise above the Fed’s 2.0 percent inflation target for an extended period of time.
Right now, the inflationary expectations built into the yield on U.S. Treasury securities is above 2.0 percent.
Market expectations for inflation built into the yield on the 5-year U.S. Treasury note is now around 2.55 percent and for the yield on the 10-year U.S. Treasury note, 2.35 percent.
These expectations have risen this year as Federal Reserve officials have talked more and more about allowing for inflation to rise above the longer-term target of 2.00 percent.
Note that at the end of November last year, the inflationary expectations built into the 10-year note were only around 1.75 percent, and at the December were right around 2.00 percent.
The future of inflation is, of course, an issue in terms of how high will the Fed allow the rate inflation to rise above 2.00 percent and also in terms of how long it will allow the rate to stay above 2.00 percent.
There are already arguments arising about when the Fed will move to keep inflation from rising any more. Some analysts are saying that the Fed will have to move before the end of 2021. This is, at this time, anybody’s guess.
U.S. Treasury Actions
There have also been a lot of questions over the past month or so about when the actions of the U.S. Government were going to start hitting the public sector. The Biden $1.9 trillion economic program was passed by the middle of March. One could see movement in the Treasury’s General Account, the account that the Treasury writes checks on, soon after.
Furthermore, it was obvious that funds were be moved around to other accounts in order to handle other parts of the government’s payments to the private sector.
Now, as the government planned, these funds are moving out of the Federal Reserve accounts and moving into the hands of private citizens residing in banking accounts.
More of this is to be expected going forward. The accounts of the federal government at the Federal Reserve are still at very high levels when looked at historically. The question is going to be how the Treasury will manage these accounts going forward.
Federal Reserve Further Purchase of Securities
The Federal Reserve is committed to the continuation of its purchases of U.S. Treasury securities and mortgage-backed securities for an extended period of time.
Chairman Powell has made a commitment, one that I believe he will stick to for a long time, that the Fed will not back off from its responsibility to get economic growth back up to a respectable figure, whatever that is, and will still operate to err on the side of monetary ease.
There seems to have been some growing concern that the Fed will back off from this policy stance in the relatively near future.
My concern is that Mr. Powell is going to continue to be very generous to the financial markets. I believe that Mr. Powell is very concerned about his role in history and does not want to go do in the history books as the leader of the Federal Reserve during a period of extreme economic stress. Therefore, he is going to stay on the side of excessive monetary ease.
As I have written before, this is a time of radical uncertainty, and, consequently, Mr. Powell does not want to be seen as being the Fed’s leader when the banking system or the financial system nose-dives into dangerous territory.
Thus, I believe, we can count on continued acquisition of Treasury securities; especially given the $1.9 trillion economic program passed earlier this year and the possible $2.0 trillion or more, “infrastructure” bill now being discussed by President and his team.
Mr. Powell is not going to take any risk that these debt issues, along with all the other credit creation going on within the economy, might in some way have trouble getting funded.
So, expect the Fed’s regular purchases of securities to continue.
What This Means
I believe that the financial markets are already responding to the position taken by Mr. Powell and the Fed.
The S&P 500 Stock Index has hit four new historic highs in the past five days and looks like it will hit another new high today. The Dow-Jones Industrial Index looks set to hit a second new historic high this week. The largess of the Federal Reserve has contributed mightily to the performance of the stock market over the past few months and the past year.
I don’t see Mr. Powell and the Fed changing their positions in the near future. I don’t see the federal government changing its position in the near future. Keep the money flowing. Watch the financial markets glow with activity.
