I thought that I would run this chart one more time.
This chart pictures the effective Federal Funds rate, a rate that the Federal Reserve held constant from September 1, 2021, through March 16, 2022.
On Wednesday, March 16, Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, announced that the Federal Open Market Committee had voted to raise the range on its policy rate of interest, the Federal Funds rate.
For six and one-half months, the Federal Reserve kept the effective Federal Funds rate constant at 0.08 percent.
The Federal Reserve manipulated bank reserves so as to maintain this rate even though other interest rates were rising during this period of time.
Note for example, what happened to the yield on the 3-month U.S. Treasury bills.
And also check out what happened to the yield on the 2-year U.S. Treasury note.
Investors seemed to be ready for interest rates to rise during this period of time.
Yet, the Fed persisted in keeping the effective Federal Funds rate constant.
Going on at this time was a debate about when the Federal Reserve would cease buying $120.0 billion in securities for its portfolio each month and when would the Federal Funds target range be raised.
Well, the Federal Reserve started the new year suggesting to the investment world that it would taper its securities purchases in 2022 coming to halt in March 2022.
Furthermore, Fed officials stated that once the purchase of securities came to a halt, the Fed would raise the range on its policy rate of interest, which it did on March 16.
In the two and one-half months of 2022, the Federal Reserve purchased, outright, only $220.4 billion in securities for its portfolio. This is taken from the Fed's balance sheet, running from Wednesday, December 29, 2021, to Wednesday, March 16, 2022.
So, tapering did take place.
But, these purchases still added liquidity to the balance sheets of the commercial banking system and to the financial markets.
Yes, the amount of purchases the Fed made did decline, but, the Fed was still pumping a lot of reserves into the banking system during this period.
This, I contend, is not an exercise in monetary tightening.
It should be noted, however, that reserve balances with Federal Reserve Banks, a proxy for excess reserves in the banking system, did decline during this period of time and this is what helped the Fed maintain the Federal Funds rate at 0.08 percent, even with all the Fed's securities purchases.
Reserve balances with Federal Reserve Banks dropped by $146.5 billion from December 29, 2021, through March 16, 2022.
So, there were other factors impacting the commercial banking system during this time.
Most importantly, the federal government was moving "tax" money from the commercial banking system to deposits at Federal Reserve banks.
In fact, $373.6 billion was moved from the commercial banking system to Federal Reserve banks.
While the Federal Reserve was still pumping money into the commercial banking system at a pretty high rate, the federal government was taking money out of the commercial banking system and placing it at the Federal Reserve.
Thus, for the past eleven weeks, the reserve balances of the commercial banking system kept at Federal Reserve were experiencing a fairly substantial drop.
The effective Federal Funds rate remained at 0.08 percent.
And other market interest rates began to climb.
Well, supposedly, the "tapering" of purchasing securities is over.
And the range of the Federal Funds rate has been raised by 25 basis points.
Federal Reserve officials have indicated that the Fed may raise the range for its policy rate of interest four, maybe five, times during 2022 and then raise it a few more times in 20223.
Furthermore, in the FOMC statement released after the policy meeting ended, we read,
"the Committee expects to begin reducing its holding of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting"
The "coming meeting" appears to be the May meeting of the FOMC.
So, the Fed's policy rate of interest seems to be on the rise and the Fed seems to be intent on reducing the amount of securities it holds on its balance sheet, but there remain some important issues that investors are still concerned about.
Following the announcement of these actions, the stock market, represented by the S&P 500 Stock Index, closed 96 points higher on Wednesday and increased another 53 points on Thursday.
This market behavior does not seem to represent a negative response to the information released by the Fed.
For one thing, even if the Fed raises the range of the Federal Funds rate by eight 25 basis point increases, that would only bring the effective Federal Funds rate up to around 2.00 percent.
This rate is still way below the current rate of inflation.
That means that the real rate of interest, the nominal rate of interest less the expected rate of inflation, will still be in negative territory.
This is not "restrictive."
Furthermore, the Fed now holds $8.5 trillion in securities purchased outright.
On April 1, 2020, just before the Fed began to purchase $120.0 billion in securities every month, the Fed held only $4.8 trillion in securities purchases outright.
That increase represents a lot of liquidity being pumped into the commercial banking system.
Just how much does the Fed plan to reduce this portfolio in order to really be able to fight inflation?
Just what does the Federal Reserve need to do in order to actually fight inflation?
Finally, the Federal Reserve faces a very uncertain future.
We really do not know what might happen.
There are so many areas of economic disequilibrium right now that one cannot really picture a "stable" tightening because so many things need to adjust to their position of disequilibrium.
Radical uncertainty is all over the place.
And all we get from the Fed about this future, is that Federal Reserve officials must "stay loose" and follow what the evolving statistics show.
That really doesn't get us too far.
The stock market is down so far this Friday morning, but that appears to be because of the Russian situation.
Right now, the stock market grade on the Fed's reported actions of Wednesday is positive. Translation: the Fed doesn't seem to be tightening up at all.
This article was written by
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