The Treasury’s balance at the Fed has begun to decline from the record level it reached in early May as tax payments due on April 15 continued to be processed. The government is now spending the massive tax windfall. With tax demands now lower, the government’s spending should give the economic data a little bump in May and June. How much of a bump will depend on how much the Treasury spends, and how much it maintains in its account at the Fed. The larger that account is, the greater the withdrawal of funds from the banking system. It acts as a form of tightening, but will only be material at the level of hundreds of billions. Less than that won’t have an impact.
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The Fed’s balance sheet will remain flat until the Fed acquiesces to the fact that it needs to begin shedding assets in order to raise interest rates. Here’s what you need to know about that along with a summary of the bubble finance conditions in the banking system.
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