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Squeezing The Lemon Dry- WSE Pro

The Fed continued to refrain from adding significant reserves via open market operations, as it prepares for Monday’s $20 billion Taffy pull. The 4 week net change has now plummeted to a drain of $6.25 billion, which is extraordinary for the time of year when the Fed is normally pumping Christmas cheer into the market. Last year at this point the SOMA had a 4 week net add of $11.3 billion. That’s a $17.5 billion swing to the tight side this year. In spite of all it public pronouncements and machinations, beneath the surface this Fed seems focused on wringing some of the egregious credit excesses of the past decade out of the system and letting the chips fall where they may.

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  1. Aaron Krowne

    Great investigative work, Lee. However, my interpretation of what the Fed is doing departs from yours a bit.

    I think the Fed may actually be trying to avoid stoking inflation — not trying to wring out credit excesses. If they were really doing the latter, they wouldn’t be granting capital reserves exemptions.

    The Fed must know that inflation is running rampant, but they (and the BLS) have masterfully edited-out the monetary portion of inflation directly due to the Fed. Since resources inflation is going wild, the Fed doesn’t want to throw fuel on the fire by adding regular old money supply inflation to the mix.

    Of course, this is all incompatible with lowering interest rates, which will increase import-sourced inflation. Tanking the dollar also increases debt service costs (i.e., for mortgages). Luckily, the Fed doesn’t include those in inflation metrics either.

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