The Federal Reserve has been jawboning their intent to unwind their almost $4.5 trillion balance sheet, nearly all of which is either Treasurys or mortgage-backed securities.
The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.
This report tells why, and what to look for in the data and the markets. GO TO THE POST
The Fed’s Balance Sheet has pretty much been on hold (treading water) since 2014 and the end of QE3, their third round of asset purchases.
But the System Open Market Account (SOMA) report from 9/13/2017 shows that The Fed actually added around $15 billion to its balance sheet.
So, no balance sheet unwind yet.
Remember, The Fed’s notion of inflation (US Personal Consumption Expenditure Core Price Index YoY) remains under their target rate of 2% at 1.40% YoY.
And core CPI growth YoY is at 1.7%, also under the 2% target.
And with asset prices such as for housing exceeding wage growth by over 2x, The Fed has quite a bit to consider before pulling the handle on the balance sheet unwind.
The US Treasury 10Y-2Y curve slope has declined from around 280 basis points in 2010-2011 to under 82 basis points today.
Here is inflation that is hiding that The Fed doesn’t want to consider.
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