By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
There’s something the government isn’t talking about.
And that’s the Fed’s rampant money printing since the banking crisis started in March.
The mainstream media isn’t helping, either.
By only focusing on interest rate hikes to keep track of the Fed’s policy, the media isn’t covering the full story.
Luckily, one report reveals the Fed’s real money movements.
It’s a report I began watching when I worked on Wall Street. It cuts through the noise of what Fed officials say and shows the true actions of the central bank.
So today and tomorrow, I’ll look beyond the headlines to break down what the Fed is really doing with monetary policy. And I’ll show you how there’s more to the numbers than meets the eye if you follow the report from week to week.
Finding Proof of the Fed’s QE Policy
Last week, I wrote about how the Fed prints money through a policy called quantitative easing (QE).
QE is when the Fed creates cash to buy bonds from banks, inflating the money supply.
And that’s exactly why the report I mentioned above is so important.
It’s called the Fed’s H4.1 report. And it comes out every Thursday at 4:30 p.m. The document contains a lot of lines and numbers. But there’s only one line of numbers you need to care about.
It’s the first one – called “Reserve Bank credit.”
That line shows the total amount of bonds the Federal Reserve is holding.
In other words, it highlights the total amount of bonds the Fed bought with the money it printed under QE.
It also shows how much the total amount compares to the prior week, and the prior year.
In the image below, you can see that the Fed is currently sitting on $8.59 trillion worth of bonds.
Why does this line matter?
Let me explain…
The Key to the Fed’s Moves is in Line One
In order to get a clear picture of what the first line is telling us, let’s step back and look at the last H4.1 report before the Fed began a policy of quantitative tightening (or QT).
QT is when the Fed either sells the bonds it holds, or when it doesn’t replace bonds that mature by buying new bonds.
Last May, the Fed said it would begin shrinking its balance sheet by not replacing maturing bonds. This QT policy started in June 2022.
When the Fed doesn’t replace its maturing bonds, it’s not printing money to buy new bonds. And that makes the demand for bonds go down.
As a result, the price of bonds also falls. (As we discussed last Thursday, bond prices and their yields have an inverse relationship. So when bond prices fall, their yields rise, and vice versa.)
When the yields on bonds are higher, it makes money tighter, because it means the cost of borrowing also rises. The more expensive it is to borrow money, the less inclined people and institutions are to do so.
Before June 2022, as the Fed grew its balance sheet, bond yields dropped. After June, when the Fed began to shrink its balance sheet, bond yields gradually rose.
For instance, before June, the total assets on the Fed’s book hit a record-high $8.879 trillion.
So the Fed decided to shrink its balance sheet by letting its bonds mature. In other words, it didn’t print money to buy new bonds to replace the maturing ones.
After a few months of this QT policy, the size of the Fed’s book shrunk. On March 9 of this year, the total amount of bonds dropped to $8.3 trillion.
You can see in the chart above how this impacted the 2-year Treasury yield.
By the end of April 2022, it was about 2.63%. Approaching June, the yield hovered around 2.71%. But in the middle of that same month, it jumped to 3.19%. And it kept rising all the way to 4.94% by the beginning of March 2023.
Tomorrow, I’ll have more to say about what happened to the Fed’s assets vs. the 2-year yields in the wake of the recent banking crisis. It relates to the government always being prepared to bail out the big banks.
I’ll also explain one way you can profit from what the Fed’s report is telling us…
Stay tuned for more.
Regards,
 |
Nomi Prins
Editor, Inside Wall Street with Nomi Prins