Transcription
Well, that only took 12 days. 12 days from the time that the Fed ended QT until they restarted the next round of QE. For context, this is the Fed's balance sheet and they have been reducing their holdings of assets on their balance sheet since 2022. That has been quantitative tightening. They recently announced quantitative tightening would come to an end on December 1st and their balance sheet would remain the same size. But on Wednesday, December 10th, they announced they were going to start buying treasuries yet again, beginning on December 12th, which means they lasted only 12 days between ending QT and restarting the next round of QE.
Now, there are some key nuances here that are important to know, but it's just funny because on October 29th at the last Fed meeting when they announced that they would be ending QT, I tweeted and I said, "How long do you think until QE restarts?" Now, there were some of you who said 6 months or less than a year. And others of you who jokingly said that they would restart QE on December 2nd, right after QT, 2 minutes after QT ends, and December 2nd again. And while I'm sure you guys were joking with those comments, turned out to be as close as you possibly could have gotten to reality.
So here we're going to take a look at the implementation notes from the most recent FOMC statement happened just a few days ago on December 10th. And like I said, the nuance matters here and it shows you that money printing has started up again. QE by any other name is still QE. And it's always important to look at the implementation notes. For reference, when you look up the actual statement that the FOMC releases after their meetings, all you have to do is scroll down to the bottom and click on the implementation note for that statement, and that'll give you the details about how they are implementing their new policy.
Now, most of this is normal, what you would expect. They're going to undertake open market operations to make sure that the Fed funds rate stays between their new range which is now lower between 3 and a half and 3 and 3/4 of a percent. What they do in the reverse repo and the repo market is going to continue to maintain interest rates overnight where they want and it's this third bullet point that we really need to look at and this was the big shocker for the entire market. The Fed will be increasing the system open market account holdings of securities through purchases of Treasury bills and if needed other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves. And I'm going to explain that here. But first, let's go to that fourth bullet point that they are rolling over at auction all principal payments from the Federal Reserve's holdings of Treasury securities. And they're reinvesting all principal payments from the Federal Reserve's holdings of agency securities into Treasury bills.
This last bullet point is what I've been talking about for the last month and a half on what the Federal Reserve started to do on December 1st. They're continuing to drain off their holdings of mortgage-backed securities from their balance sheet. and new leadership at the Fed has indicated they want to eventually hold none of these. They're trying to completely get rid of holding mortgage back securities. So, they're still letting those roll off their balance sheet. Any money that they get paid back from those, they're taking that money and loaning that back out to the US government instead. So, QT for mortgages, QE back into T bills for the government, general easing in that way. And then any money that gets paid back to them from the government when T bills or treasuries mature, they just roll that straight back over, loan that right back out to the US government, buy more treasuries. So nothing in this fourth bullet point should be a surprise to you, unless this is the very first video that you've ever watched from me. In that case, welcome. Glad to have you.
So this third bullet point was the real surprise that nobody was expecting. And it all sounds like gibberish to you. It means that they're going to be purchasing more treasury bills and treasuries than just keeping their holdings the same. Up until this point, they have stated their intention to just let their balance sheet stay the exact same, but now they will actually be adding to that and buying more. Now, the stated goal of this is reserve management. I will explain what that means in a moment, but the result of that is that for the first 30 days, the initial round will be about $40 billion of net Treasury bill purchases for the first 30 days. They said this is a move to ease short-term funding costs. For the last couple of years, the Federal Reserve has been doing the exact opposite. They've been trying to drain reserves from the system because they said we were in an abundant or an excessive reserves environment. So QT for the last couple of years has had the express purpose of reducing reserves. And now just 12 days after that process came to an end, they're reversing course and saying, "Well, we actually went too far. We need to purchase more of these yet again in order to make sure we still have ample reserves." And again, that means buying $40 billion worth of Treasury bills.
Now, treasury bills, just in case you aren't aware, there's treasury bills, treasury notes, and treasury bonds. Those are all government debt instruments. It's just a difference in when that debt matures. And if we go to the Treasury's website, treasurydirect.gov, we can see bills. T bills are short-term debt instruments that mature in one year or less. Notes are medium short to medium-term debt securities that mature in either 2, 3, 5, 7, or 10 years. And then Treasury bonds are long-term securities that mature in 20 or 30 years. But these are just arbitrary lines that have been drawn in the sand. These are all debt instruments. It's just different ways the government borrows from people or institutions and different time frames for when they pay you back your principal.
The reason why this matters is because historically anytime the Fed is buying something like Treasury bills, they say, "Hey, this is not for general easing. This is not to get prices to go up. This is not to combat deflation. This is not for any purpose other than just reserve management. We want to make sure there's no liquidity crisis. This is exactly what they said back in September of 2019 after the repo market blew up. You can see their balance sheet started heading higher again. And when they started buying tea bills during this time, everybody was losing their minds because Jerome Pal came out and said, "Nope, this is not QE because this is not for easing. This is for liquidity, but at the end of the day, the Fed is still printing money and purchasing US government debt with it. Regardless of how the financial system uses T bills versus notes versus bonds for liquidity or reserves or holding assets long term, the net result overall is the same. More money is being printed into existence and lent to the US government. And that is exactly what's going to happen from here. This is why everybody called it not QE at the time because QE had gone through multiple rounds. There was QE1, QE2, QE 3, and then now when the Federal Reserve in 2019 started buying T bills and they said it was not QE, we just called it not QE in quotes because we all knew that's exactly what it is.
Now, here's a question that I'm not sure the answer to yet, but I'm sure we will find out soon. I don't know if the balance sheet itself will actually move up. Now, one reason why this is important is because in the implementation notes, it says that the Fed will be purchasing Treasury bills and if needed, other Treasury securities with remaining maturities of 3 years or less, which means this is actually different than the last time because the last time they did it just for reserve management, it was strictly T bills. But this time they're saying, "Hey, well, we might need to also do two-year notes, three-year notes because, you know, we may need to." So, they are extending it out across a larger area of the yield curve, even though they're stating it is still just to maintain an ample level of reserves. They have more flexibility now with what they're buying.
Now, the reason why I'm making such a big deal about this is because I think it's important that people understand the net results of this because we don't really need to get caught up in everything the Fed says about the reason why they're doing it and okay, we're doing bills or we're doing up to three years and before when we were doing QE for actual QE purposes, we were buying across the entire yield cone of that matters. The result is the money supply is expanding. The effect of the money supply expanding is that your prices go up. Gold goes up, Bitcoin goes up, real estate goes up, groceries go up, gas goes up, cars go up, your wages eventually later on go up. An expanding money supply is a tide that lifts all boats unequally at different times. And if you're not positioned accordingly, you may be left on the wrong side of the fence. Yes, I know I just mixed two metaphors or analogies there, but you get the point.
This is a chart of the total money supply in the United States. And you can see after the brief hiatus of the money supply shrinking during QT, the money supply actually started expanding again all the way back in 2023 and has been going up ever since. We never got anywhere near the path that it was on prior to all the money printing in 2020. And if you go to the Fed's website and you look up this chart, it is WM2NS. that is the M2 money supply. And then you click edit graph. And instead of showing the total number, the billions of dollars in the money supply, you change it to percent change from a year ago. Now you can see the rate of change in the actual money supply. And yes, the money supply was shrinking. The rate of growth was negative for a brief period of time, but it is now growing at a rate of 4.4%. And that is annual. The percent change in the money supply from last year at this time to right now is 4.4%. 4%. Now, that doesn't mean that the exact level of price inflation will also equal 4.4% because there are other factors affecting that like growth. If something gets cheaper because a producer figures out a way to make it cheaper, produce it more cost-effectively, then that deflationary force will offset some of the monetary inflationary force. So, growth offsets inflation and vice versa. That means it is next to impossible to actually measure what the real rate of inflation is. But if everything else stays the same and the money supply grows, prices grow. And so looking at the growth rate of the money supply gives you a good starting point at the very least. And the key part here is it's headed higher. We have seen the money supply growth rate go from negative territory to now at 4.4% without the Fed. Remember, this whole time they've been draining their balance sheet. And only now are they lowering interest rates, ending the draining of their balance sheet, and now restarting QE, which means we have more fuel added to the fire of monetary inflation, monetary expansion, more money supply being a rising tide that lifts all boats. Position yourself accordingly.
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