The Fed’s balance sheet shrank dramatically this week as banks paid off TAF loans and reduced their deposit accounts at the Fed on which they are no longer earning any interest. When the Fed cut the interest rate it paid on reserves I warned our subscribers that this would be the result. I expect this to be the beginning of a trend. In addition we saw reductions in PDCF, DW borrowings, currency swaps, repos outstanding, and TSLF. Over $100 billion disappeared from the Fed’s balance sheet this week.
So much for monetization. Banks all over the world are choosing to repair and shrink their balance sheets at the same time as the Fed is desperately trying to stimulate. But nobody wants to borrow and nobody wants to lend. This could lead to implosion of the Fed’s balance sheet in a massive wave of deflation in spite of its furious efforts to the contrary.
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