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> Does the nominal amount of money on the Fed's balance sheet matter/should we strive to bring it to $0

This speech by Chairman Powell is information about the Fed's current thinking on this question: https://www.federalreserve.gov/newsevents/speech/powell20190...

In short, the Fed will not aim to return its balance sheet to the same size, relative to GDP, that it was before 2008. One reason is that the 2008 crisis revealed the importance of requiring major banks to keep reserve balances (and these reserve balances are liabilities on the Fed's balance sheet). There are also other technical reasons commented on in that speech.

Well and that’s the point a lot of people miss - that $9T isn’t like $9T one-dollar bills.

Essentially the government got to spend $9T “for free” (don’t come at me inflation hawks) one time and this is the accounting convention that forces us to remember that happened. If the Fed just decided to mark those treasuries to 0 and not collect the interest, who is going to stop them?

Things generally get very weird when you get to national-account level accounting for countries with reserve currencies.

> Is that removing liquidity? Not really, it's just decreasing the active injection of liquidity that the Fed has been doing for the past 15 years.

This is a pretty ideologically based statement. The fed is quite literally removing liquidity from the system. They aren’t “actively” adding any liquidity and haven’t been for months.

For context, yes it’s helpful to keep in mind the build up of the balance sheet, but the spin here is overly politicized.

>They aren’t “actively” adding any liquidity and haven’t been for months.

Just so you know, in order to keep the balance constant, the Fed actively participates in the market to buy new Treasuries to replace those that have matured.

I see no ideology in saying that buying bonds (even if it's to replace old ones) is active support.

In fact, the Fed is still a huge player in Treasuries markets even during QT.

I’m aware that is the case. If they weren’t doing that, though, it would result in a massive uncontrolled level of tightening. I don’t see how it’s somehow a bad thing that they are being intentional about the draw down.

If I were to buy a bond ETF, that fund would be doing the same thing on my behalf. I wouldn’t be “buying” bonds just because the underlying product is maintaining a fixed asset level/ratio.

>I’m aware that is the case. If they weren’t doing that, though, it would result in a massive uncontrolled level of tightening.

Yes, so they aren't 'removing liquidity' because they are still 'injecting liquidity' at literally every treasury auction (as they have been for 15 years). They are simply injecting less liquidity than they have been, which is my entire point.

>I don’t see how it’s somehow a bad thing that they are being intentional about the draw down.

It's not a bad thing and I never said it was. If you want ideology, I think the Fed shouldn't even be doing QT and probably never should (I think inflation is largely unrelated to this liquidity).

>If I were to buy a bond ETF, that fund would be doing the same thing on my behalf. I wouldn’t be “buying” bonds just because the underlying product is maintaining a fixed asset level/ratio.

In literal terms, the government holds an auction for Treasury debt at various maturities. ~20 primary dealers bid on those Treasuries. Those ~20 primary dealers know exactly how much The Fed needs to buy from them. That influences their bids. If The Fed weren't buying from those dealers, they would bid for higher rates. In no way do those dealers consider the amount of debt that has reached maturity that month, they only care about new issuances.

Isn't this pretty basic supply/demand stuff here? Are you also implying that demand for bond ETFs has no effect on the price of underlying bonds?

> Yes, so they aren't 'removing liquidity' because they are still 'injecting liquidity' at literally every treasury auction (as they have been for 15 years). They are simply injecting less liquidity than they have been, which is my entire point.

Your point is myopically focused on the bond market (and realistically the mortgage backed securities market as well).

The net amount of liquidity is going down. They are removing liquidity.

If I’m in a sinking ship and frantically pulling out buckets of water, the ship is still sinking even though I’m removing water. The fact that the fed has to continue to make bond purchases is a technicality that is irrelevant to anyone outside of the trading industry, and has little net effect of the Marco economy.

Like, when headlines come out saying “alphabet stock sell off on earning miss” do you tell everyone around you that technically there was a buyer on the other side of every one of those transactions?

>The net amount of liquidity is going down. They are removing liquidity.

Yes, they are actively injecting less liquidity than they were before which is my original point?

Wouldn't removing liquidity be actually selling holdings?

EDIT: Maybe this helps - you're taking for granted that the US Treasury auctions an increasingly large amount of Treasuries to cover an increasingly large amount of debt, but The Fed doesn't create that debt, that's a separate phenomenon. If the government balanced its budget for a year, does that create liquidity?

The fed removes liquidity every time it receives a coupon payment or a bond matures (ie, it gets paid cash by the government). It could stop all open market operations and it would continue to remove liquidity from the system by virtue of that process. So, no, it doesn’t need to sell any assets in order to remove liquidity from the system, it simply needs to have lower net outflows of cash than its inflows of cash. As the headline states, since mid April it’s net outflows of cash have been $140 billion less than its inflows.

Wait, it's really hard to follow you here.

The Fed reduces liquidity by receiving coupon payments? So then, unless it's growing its balance sheet by the amount of those payments (i.e. returning that cash to market), it's removing liquidity?

Interesting take, I like the moxy.

EDIT: You have QE/QT backwards. QE increases the money the Treasury sends to the Fed as coupon, which you said removes liquidity.

My entire point was that you are backwards in one of your two conflicting arguments.

> Quantitative easing (QE) is a monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets (e.g., municipal bonds, corporate bonds, stocks, etc.) in order to inject money into the economy to expand economic activity.

[0] https://en.wikipedia.org/wiki/Quantitative_easing?wprov=sfti...

Yes. Would you beleive I agree with that (maybe you would if you actually read your own comments)

You stated that receiving coupon payments from the Treasury reduces liquidity. How? I don’t know. But you said it.

Buying more Treasuries makes the fed receive larger coupon payments. Are you saying that process reduces liquidity?

That’s my only question.

> EDIT: Maybe this helps - you're taking for granted that the US Treasury auctions an increasingly large amount of Treasuries to cover an increasingly large amount of debt, but The Fed doesn't create that debt, that's a separate phenomenon. If the government balanced its budget for a year, does that create liquidity?

Do you actually understand what liquidity is?

Bonds are just one instrument the fed uses, the bond market isn’t the end all be all of open market operations. As I noted earlier, the fed was previously injecting liquidity by buying bonds and mortgages. What you’re talking about is tangential.

Liquidity is the amount of cash in the system relative the size of the market for assets. All else equal, adding or removing is the same as adding or removing cash.

I can't reply to your many new comments (guess this is a flamewar lol), but

>Liquidity is the amount of cash in the system relative the size of the market for assets. All else equal, adding or removing is the same as adding or removing cash.

Citation needed there buddy. Like you're arguing that the Fed is hoovering up too much cash? Wouldn't QE be anti-liquidity since it's net result is more cash goes to the Fed and QT be pro-liquidity since the opposite happens?

On this earth, liquidity is about transaction velocity, and The Fed taking transactions off the table (by being a guaranteed buyer at every auction) makes non-Fed transactions happen at lower prices. The end.

Anyway, enjoy the end of this flamewar.

> Wouldn't QE be anti-liquidity since it's net result is more cash goes to the Fed and QT be pro-liquidity since the opposite happens?

You have QE and QT backwards.

QE => fed builds up it’s balance sheet, it sends out cash.

QT => fed reduces its balance sheet, it gets cash back.

>On this earth, liquidity is about transaction velocity, and The Fed taking transactions off the table (by being a guaranteed buyer at every auction) makes non-Fed transactions happen at lower prices. The end.

Transaction velocity matters but it’s not everything. You’re myopically looking at one market, while the rest of us are talking about the systemic effects.

Transaction volume follows from the supply and demand for money. If you remove money from the system, you remove liquidity.

Look, you quoted a blatantly incorrect definition of QE/QT below. You clearly have no idea what you’re talking about.

You have QE/QT backwards. QE increases the money the Treasury sends to the Fed as coupon, which you said removes liquidity.

My entire point was that you are backwards in one of your two conflicting arguments.

EDIT: Maybe let's put it this way, the US pays off it's debt and no longer sends coupon payments to anyone. In your framework, that reduces 'liquidity.' But in what market exactly? The "systemic" market?

> Is that removing liquidity? Not really, it's just decreasing the active injection of liquidity that the Fed has been doing for the past 15 years.

I like this line a lot because it shows that while we like to blame inflation and some of the issues we're having on the Fed's work in 2020, when in reality we have to go back to the Great Recession to understand the full impact of what's been going on. They've been trying to keep the markets happy for 15 years by keeping interest rates low and so, never reverted some of the policies that would have helped when COVID hit the economy. So, they doubled down. Now, the chickens have come to roost and they need to reel back, and hopefully, the markets won't get spooked and it will all be good, as you say.

Once the Fed funds rate gets closer to 5%, you'll see more pushback from politicians and media. What does the Fed do in this situation if it needs to keep tightening? It may choose to switch to smaller rate changes, or even go flat, and at the same time embark on Treasury sales, or at least, rebalancing along the curve. So either way, not a good time to be in bonds.

Here's what's weird. Believe it or not, the Fed Funds Rate lags 10Y Treasuries and rarely goes above it [0]. I would even go as far to argue that's it's mainly a potemkin policy tool at this point, since our economy is so exposed to 10Y Treasuries, which have completely unrelated pricing dynamics.

So in practical terms, if there is political pressure to lower the 10Y, The Fed will probably cut Fed Funds (doing nothing, hopefully dropping it as a policy tool going forward) and then everyone will kind of realize QE is the only current policy tool that actually works.

But then what, people will be calling for more QE to make mortgage rates drop? I mean fine, but it does speed up the 'when does the market question the concept of the Fed owning the Treasury's debt' problem.

[0] https://fred.stlouisfed.org/graph/fredgraph.png?g=TXsO

Thanks. This is actually really helpful.

Obviously the US economy doesn't work like an individual's economy (as in, you can't just spend less than you earn and be OK) but it's really difficult to understand what the complications actually are and posts like this help a lot.

> Is that removing liquidity? Not really...

I disagree.

The US Treasury must issue new treasury bonds every month with face value equal to (a) that of old treasury bonds that mature, plus (b) a bit more to fund the federal deficit.

Someone else must buy all those new bonds, because otherwise the US Treasury would not have sufficient funds to pay back the old ones as they mature.

This means that someone else must somehow find liquidity to buy all those new bonds.

That someone else is (the private-sector parts of) the financial system. Who else would it be?

All that liquidity will leave the financial system's hands.

If I give you $100/month for 15 years and then give you $95 this month, am I taking money from you?

There's zero giving involved.

For years, the Fed has purchased bonds, paid for with newly created liquidity, and now, as the bonds mature, the Fed is getting paid back, removing liquidity from the financial system.

>There's zero giving involved.

Technically, the Fed gave the Treasury cash in exchange for debt, no? And it was giving the Treasury more in the past than it is now.

To extend the metaphor, You (the treasury) have $100 in expenses (debt) that I used to pay (buy). Now, I (the Fed) pay you (The Treasury) $95 and you need to ask your friend (the financial markets) for the other $5.

Sure, that's less than before, but nowhere near what actual removing liquidity would look like: actively selling holdings in addition to not replenishing matured Treasuries (in the metaphor: asking you to pay me the debt you owe me/giving you a new expense).

The Fed is not allowed to buy bonds directly from the US Treasury, let alone give them anything (!?). See here:

https://www.federalreserve.gov/faqs/money_12851.htm

The Fed has been buying bonds by issuing new liquidity, and will be getting paid back, removing liquidity.

This thread that you started is starting to feel... as if the purpose is no longer to find and agree on facts, so I will step away from it. This will be my last comment on it.

You can see my earlier comment about the ~20 prime brokers who bid at auction, but boy howdy does this feel like splitting hairs. Sure, the cash goes through intermediaries, and it's actually a huge source of economic rent/corruption that noone other than Song and Zhu seem to care about, but that doesn't change the ultimate flow of 'giving'.

>In literal terms, the government holds an auction for Treasury debt at various maturities. ~20 primary dealers bid on those Treasuries. Those ~20 primary dealers know exactly how much The Fed needs to buy from them. That influences their bids. If The Fed weren't buying from those dealers, they would bid for higher rates. In no way do those dealers consider the amount of debt that has reached maturity that month, they only care about new issuances.

Yes because I am also giving you $100 when you give me $95.

If you gave me $100 15 years ago and today ask for $5 back, you're taking money from me (also every month we handed the $100 back and forth)

Why does it make sense to think of it any other way?

You’re at the wrong stage of the metaphor.

The Fed has actively purchased new bonds worth roughly 10% of its holdings from the open market each year just to keep the balance constant.

QE requires active support to remain in place.

Now the Fed is purchasing new bonds worth roughly 9% of its holdings each year, and like sure that’s less than max, but it’s still gross buying like $900bn of treasuries this year (instead of the $1tn it would’ve otherwise).

The problem that a lot of people have here is they think “well the treasury issues new bonds to make up for the bonds that mature,” which again, sure, but that’s an independent phenomenon from what the Fed is doing. Congress could balance the budget and that wouldn’t change what the fed is doing rn.

The purchase of bonds by the Fed for the purpose of rolling over its holdings is not on the open market. It is not doing 10% of the same thing it did to build that balance sheet during QE again every year.

> some combination of the US government's ability to indefinitely tax the largest/most advanced economy in the world + the US military are the two things cited as to why this is true

+ USD being reserve currency of the world, which basically means that rest of the world also pays for US debt/printing money.

To be honest, I think you need to preface your comments with some caveat about absurd opinions you have, because you're trying to pass this off as authoritative but lots of this is just pure opinion. We're on a forum where if you posted a similar comment about an raspberry pi I'd take you literally as an expert, but this comment clearly contains a load of opinion that's not backed up by fact. I worry someone might mistake you for making a technical statement where it's clearly just a political statement.

I'd love a list of the opinions you found so I can preface them, then.

Care to elaborate for those who are interested?

I'm not the OP and don't have a horse in this race and haven't commented elsewhere in this thread, but it would be interesting to hear more about which claims and from which users you object to as opinion-y.