Saturday, February 07, 2009

Fed Balance Sheet Contraction Continues

The weekly average for the Fed balance sheet (AKA Reserve Bank Credit) fell another $149.1 billion to $1840.7 billion, continuing the trend I reported about last week. It is now down 18.1% from its peak in the week ending December 31, 2008.

As the chart illustrates, it is still at a very elevated level (It is still upp more than 100% compared to 52 weeks earlier), but if the trend continues it could stop the recent high level of money supply growth. M2 continued to rise during the week, while MZM fell back during the week because of a big drop in Institutional Money Funds.

UPDATE: David Altig discusses this contraction here. He points out that much of the decline has come in the commercial paper funding facility and that demand for that has gone down as risk aversion and so also commercial paper yields have gone down. And that similarly currency swaps for foreign central banks have decreased because the factor that made central banks demand it, the high LIBOR rates, has similarly abated.

He is probably right about this, but even excluding these assets, Reserve Bank Credit has contracted.


Anonymous Matias Forss said...

It seems like this is good news. If only the Obama administration would refrain from "stimulating" the economy, the world might not have to face an economic disaster.

Trends forecaster Gerald Celente talked about a commercial real estate collapse in the U.S. this year in a youtube clip. And it might be that unemployment hasn't yet caused big losses in consumer credit. How would you estimate losses due to U.S. banks not yet realized?

4:11 PM  
Anonymous Anonymous said...

Won't this drive up interest rates? Or am I missing something? I am assuming the FED is selling of assets, or is it just the money borrowed under the Term Auction Facility that is being payed back, and the collateral that is moving out of the Fed balance sheet?

The recent political trends points towars this being a way to make room for massive purchases of Treasury Bonds as soon as the fiscal "stimulus" starts pouring out. But then again I am just repeating what you said, and agreeing. Hope to see more of this kind of stuff soon. Your blog is a valuable source of information.

4:38 PM  
Anonymous David Pearson said...

David Altig is wrong. It doesn't matter how the Fed removes liquidity as the end result is the same. He sees this as the Fed declaring victory over certain credit spreads. Fine, as long as M2 growth is now self-sustaining -- that is, as long as the increase in velocity is permanent. The danger is that using market signals such as current credit spreads can make monetary policy "jerky", zigging and zagging in response to temporary shifts in market mood.

Good luck with that.

8:03 PM  
Anonymous Anonymous said...

The golds has stopped going up,could be a sign?


10:07 AM  

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