Fed Says Balance Sheet Could Hit $9 Trillion By 2023
Last week, when the entire crypto space was in freefall, we pointed to an analysis by Deutsche Bank which laid out in the cleanest way possible why the long-term trajectory for bitcoin and its non-fiat peers, was orders of magnitude higher than current levels.
The reason, as the bank’s credit strategist Jim Reid postulated, is that “even after a taper this is far from the end of balance sheet expansion” and to prove his point he showed the CBO’s forecast path of US public debt out to 2051. As Reid said, “the debt will need to be funded and if the Fed balance sheet to debt ratio stays at the post GFC average (c.30% vs c.38% current) then the Fed balance sheet would be around $40tn in 2050 from just under $8tn today.“
Of course, before we get to 2050 we have to get through 2021, then 2022, 2023 and so on.
Which is why we read with mild if detached amusement the Fed’s 82-page magnum opus report on its Open Market Operations in 2020, which was mostly familiar territory and included a detail breakdown of “select policy actions during 2020″…
… which can be summarized as follows:
nationalize the bond market.
Fed intellectual masturbation aside – yes, yes, you saved the world… even if it means that during the next crash the Fed also have to buy stocks outright – there was one notable highlight in the report: the Fed’s projections. Here’s what the Fed said about the world’s biggest (and growing) collection of securities in the world: it’s own balance sheet.
The SOMA portfolio grew substantially over the course of 2020 as a result of the FOMC’s asset purchases, which were conducted to support market functioning and foster accommodative financial conditions. In coming years, the size of the portfolio—and the balance sheet as a whole—will largely be determined by FOMC decisions regarding asset purchases and reinvestment policies. The Committee has provided outcome-based guidance on asset purchases, and the size of the balance sheet will evolve along with changes in economic conditions and progress toward the Committee’s goals. As such, the outlook for the balance sheet remains uncertain and the projections presented here are meant to be purely illustrative and to demonstrate a range of possibilities for the path of the portfolio, the size of the balance sheet, and income. As in prior annual reports, the assumptions underlying the projections largely reflect the expectations of market participants and are drawn from results of the Desk’s Surveys of Primary Dealers and Market Participants (Desk Surveys) as well as simple rules used to proxy the evolution of Federal Reserve liabilities.
Wordy if hollow preamble aside, here are the numbers:
The exercise suggests that the SOMA portfolio could grow through ongoing asset purchases to reach $9.0 trillion by 2023, or 39 percent of GDP. The portfolio is then assumed to be held constant, with proceeds from maturing securities being reinvested. After that point, the path of the portfolio will depend on choices made regarding the portfolio as the FOMC normalizes the stance of monetary policy. In the projections, we show a range of potential outcomes, with the size of the portfolio staying steady at $9 trillion or reaching as low as $6.6 trillion.
As the composition of asset purchases during the growth phase remains roughly constant, and maturities and principal payments are reinvested into like securities, the composition of the portfolio remains steady through 2025, with the portfolio composed of roughly 70 percent Treasury securities and 30 percent MBS. Thereafter, the composition of the portfolio would depend both on the Committee’s approach to normalization and the pace of agency MBS paydowns… the exercise assumes that once the long-run level of reserves is reached, the portfolio resumes growth through purchases of Treasury securities only, and the share of MBS held in the portfolio would decline.
Translation: the Fed ridiculous assumptions aside, the Fed’s balance sheet is set to hit $9.0 trillion at least just to keep the US Treasury funded, and then it really explodes hitting at least $40 trillion in 2050, although we very much doubt that there will be a Federal Reserve some 29 years from today.
Mon, 05/24/2021 – 13:30