The Fed’s irony

The official playbook for the newly appointed Fed chairman consists of decreasing the Fed’s balance sheet and cut rates. In his mind, and we will not disagree with him, inflation is primarily caused by money printing, not by low interest rates. And here lies the big irony: currently, the Fed is doing exactly the opposite. Take a look at the charts below: the market is now expecting higher interest rates (blue line, top chart), following the Fed indications. And if you look at the bottom chart, you will see the Fed is increasing its balance sheet through what it’s called now RMP (Reserve Management Purchases), which is nothing other than QE, but instead of buying long duration bonds, they’re buying T-bills, since it’s mostly what the Treasury is issuing. The bottom line is, the market may be set for a surprise if Mr Warsh decides to go on with his ideas. The small Balance sheet is perhaps the easiest one, since out of a crisis, the market may not need liquidy support. Which begs the question: why are they buying T-bills now? Regarding rates, lowering them when inflation is rapidly increasing doesn’t seem prudent. Investors look forward to Mr Warsh take on the issue.

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