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
Management firm.
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FOMC Meeting and Interest Rate Update from Last Week
Last week, here in our preview of the meeting post, we discussed what the Federal Open Market Committee would likely review via the fortunate lunch with local Dallas Federal Reserve Chair Robert Kaplan and even had direct audio from the event.
We know it’s summer and we know many of you may be taking much needed R and R, but the FOMC meeting last week was surprisingly important.
Important Update Meeting Review
Jerome Powell, FOMC Chair released his decision to NOT lower rates ….
our comments….
From information gathered via the audio and economic data points available at the time, we felt strongly that the FOMC would not LOWER rates, that’s in bold because until just recently, many thought future increases may be in the cards.
However … this statement, in the FOMC press release was deemed to mean rates will be lower at the next meeting, which put wind int he sails of Capital Markets …
Here is the joint estimate of FOMC members for GDP (Gross Domestic Production-broadest estimate of US growth) for the remainder of the year … note an expectation of slightly slower growth for the remainder of the year and into 2020/21:
There is also a Dot Chart that shows where FOMC members expect rates to be over the same time period, but it was a mess and confusing…so we left it out!
Not playing Economist here, but there is a lot of room for lowering or NOT lowering as well… time will tell, but for now the general consensus for the next meeting which is at the end of July (30-31) is for a lowering of rates, at least by most Market Participants or those with a microphone …. Call us skeptical of agreeing at this time….
Bottom Line: No rate lowering but rhetoric that was taken by market participants as a lowering is in the cards sooner rather than later!
There are some nice positives that come with these expectations… Mortgage Rates will likely continue to stay low and may even go lower!
Sorry if we got into the weeds, but we wanted to clarify the slightly blurry statement, reaction, and expectations!
Have a Great “FOMC Meeting Update” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
jkfinancialinc
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Posted in Earnings, Economy, FOMC, Forecast, Interest Rates, Investing/Financial Planning, Market Comments, Political
Tagged FOMC, FOMC Forecast, FOMC Rates, Interest Rates