Fed’s balance sheet increased last week and it has caused concern among investors, but it’s a necessary move to ensure that the economy continues to recover. The banking industry is in crisis, and the Fed’s intervention is necessary to provide liquidity and support. While inflation is a concern, the Fed is willing to take the risk to ensure that the economy continues to recover. The creation of the new emergency liquidity facility is a welcome move, and it’s likely that the Fed will continue to take the necessary steps to support the economy and ensure that the recovery continues.
The Federal Reserve has been making headlines recently with its significant balance sheet expansion. In the last week alone, the Fed added about $300 billion in assets to its balance sheet, the largest increase since March 2020. This sudden increase in assets on the Fed’s balance sheet has caused concern among investors, with many wondering if it’s a sign of trouble or a necessary move.
The Fed Put is Back
The “Fed Put” is a term used to describe the Fed’s willingness to support the economy by providing liquidity when it’s needed. The Fed’s balance sheet expansion in the last week is a clear indication that the “Fed Put” is back. The increase in assets on the Fed’s balance sheet has effectively erased 54% of the Quantitative Tightening (QT) enacted since last June. This move suggests that the Fed is committed to ensuring that the economy continues to recover and that there is enough liquidity in the financial system.
Fed’s balance sheet and Banking Crisis in One Chart
The recent increase in the Fed’s balance sheet comes at a time when the banking industry is experiencing a crisis of confidence and liquidity. Financial institutions have taken billions in short-term loans from the Fed, and banks have borrowed $11.9 billion from the new BTFP. The Fed’s discount window hit a record high, with borrowing from banks reaching a record $152.8 billion. These numbers are a clear indication that the banking industry is in trouble and that the Fed’s intervention is necessary.
Inflation and the Fed’s Balance Sheet Strategy
Inflation has been a concern for the Fed for some time, with official figures showing a year-over-year increase of 6%. The Fed’s recent pivot in its balance sheet strategy is an attempt to address this concern. The Fed is expanding its balance sheet, which will increase the supply of money in the economy, and potentially lead to an increase in inflation. However, the Fed is willing to take this risk to ensure that the economy continues to recover.
The Fed’s Emergency Liquidity Facility
In response to the current crisis in the banking industry, the Fed has created a new emergency liquidity facility. Banks have borrowed $152 billion at the Fed’s discount window, and the Fed’s balance sheet has increased to $8.69 trillion, the highest level since November. These moves are necessary to ensure that the banking industry has enough liquidity to continue to operate.