Last Wednesday Janet Yellen, FOMC (Federal Open Market Committee) chairperson released comments on their duty as Federal Reserve members but also introduced a term that may be new to many.
“Shrinking the Balance Sheet”
What is the Balance Sheet
Much to the happiness of all those bookkeeper, accountants, CPA’s and the like, present party included, entries must balance. Even the US Government as huge as it is, runs by the old adage
Assets = Liabilities + Equity
A basic accounting principal, that MUST always work…
If a change is made, it must be counted somewhere else, even on the USA’s balance sheet.
Bulking up the Balance Sheet
Post “Great Recession of 07-09” FOMC members smartly embarked on a successful but unknown effort at the time, of infusing banks and capital markets with Greenbacks aka $ Dollars!
The Federal Reserve led by FOMC members, with the click of a button created money in their checking account and created a contra account for balancing purposes then went out to capital markets and bought bought bought in HUGE quantities various capital instruments, but for the most part US Bonds of all maturities.
Their goal, again unchartered territory at the time was to infuse money into the system and also lower interest rates.
By purchasing large quantities of instruments the FOMC were putting dollars directly into the system … there were other programs as well, but for the sake of simplicity, their buys pushed money into, at the time, a much needed financial system.
The numbers of this chart are not as important as the line and dates.
As the FOMC clicked and bought and clicked and bought again in keeping their books “Balanced” the Federal Reserve Bank Assets Grew and Grew.
Finally the Sizzle, Shrinking the Balance Sheet
Take a peek at the far right of the line in the chart… Come on now you can do it …. this is important, and you have come this far …
What do you see? It’s flat lining….
Since most of the FOMC purchases were bonds of various types, and bonds mature, that line should begin to decrease. The FOMC holds such a huge portfolio of bonds, maturity occurs almost constantly.
Until now, the FOMC has re-invested or repurchased maturing bonds with new bonds, thereby holding that line flat. Yellen and crew are now signaling they may NOT re-invest those maturing bonds, which would lead to a VERY SLOW decline in the FOMC balance sheet or a …
“Shrinking of the Balance Sheet”
These words have been carefully chosen. Eventually the FOMC may actually sell their bonds back into the capital markets, reversing the stimulus applied in the “Great Recession of 07-09” more quickly. That would not be called “Shrinking” that would be called lowering, reducing, or something similar, look for this type of cryptic rhetoric in the future …. for now, shrinking simply means letting the maturing bonds mature and NOT re-investing … Shrinking the Balance Sheet !
There you have it, this post turned longer than expected, but the background should have made for a clearer picture … if you made it this far, pat yourself on the back… You now know the current “Shrinking” step along with likely future announcements by the FOMC and committee members!
Have a Great “Deciphering Cryptic FOMC Rhetoric” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth