The Fed’s balance sheet resumed its growth in August after a bit of a stall in July when dealers paid off Fed repos. That program has been at zero since then. Dealers don’t need to borrow from the Fed when the Fed is cashing them out every week with QE.
And there’s the rub for bears. There’s still enough QE to keep this farce going, short term factors notwithstanding.
Last week was MBS settlement week (see last week’s QE update). That pumped $100 billion into dealer accounts. Not all of that showed up on the Fed’s balance sheet total assets because other assets were paid down in the. MBS get paid off in the normal course of business during the month. Some of the Fed’s superfluous alphabet soup programs have also had reductions.
But that stuff doesn’t really matter to the stock and bond markets.
Our focus is on the Fed’s securities holdings, in what’s called the System Open Market Account (SOMA). That’s where the action shows up. It’s the money that the Fed pumps into the financial markets through its straw men, the Primary Dealers. And that is still steadily growing.
Here’s what that means for the outlook and strategy.
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