This post is clearly dated…. BUT it is actually what current chair Jerome Powell is doing today in addition to raising rates! Enjoy the replay review!
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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$treet-¢ents 
Fourth Quarter 2022 Review, Bill(s), Rates, Bills and Sunshine – Private Policy, Annual Offerings
Dear Investor:
Bill(s)
On December 20th, 2019 the Secure Act was singed into law. On December 27th , 2022 the Secure Act 2.0, a bill long in the works and a mere 4200 pages long was signed into law. The most important item in the financial world (there were a multitude of areas addressed) as the second upping of RMD’s to age 73. Look for more information soon from us.
Rates
In December the FOMC (Federal Open Market Committee) led by Jerome Powell raised rates to over 4% after starting the year at zero. As mentioned in our Q1 2023 Newsletter article (Maybe a Tiger can change Stripes0, on a percentage basis this would be a possible once in a lifetime speedy move. This may also be a return to a normal interest rate policy (hopefully) with no intention of going to the zero boundary again. See Next point.
Bills
Not getting too wordie, but US citizens “bills” or the increase in them in the form of food, travel, energy, housing just to name a few are what is creating the opportunity of the afore mentioned speed of rates or rate increases. The CPI (Consumer Price Index) measurements continue to hold at much loftier levels than anyone thought possible (somewhat due to lagging indicators) and are allowing rates to rise and likely stay higher for longer. This is a good thing for our safe assets aka Fixed Income/Bonds thankfully as most of the headwinds are likely behind us, again see Q1 2023 Newsletter lead article and associate graphs.
Sunshine
Last year at this time we were reviewing items such as “Anatomy of a Slowdown” and “The R” Word – Recession.
Today, from our unique “Personal Reflections” portion of our Q1 2023 Newsletter :
“Future is better
Just as we pointed out over a year ago what a slowdown looks like and that it might occur, we are now ready to point out later on this year it’s very likely the clouds of higher interest rates and two feet on the economic brakes by Powell are likely to clear.”
This is also the time we attach our Private Policy Statement for the year, along with our opportunity to offer our latest ADV filings and Client Relationship Summary (Form CRS); Requests for review will be accepted via phone, mail or email, and mailed immediately upon request.
Happy Turn of the Calendar, and Best Wishes for the Start of a New Year!
Sincerely,
John A. Kvale CFA, CFP
Enclosure (2022 Report)
J.K. Financial, Inc.
PRIVACY POLICY NOTICE
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In order to protect your personal information, we maintain physical, electronic and procedural safeguards to protect your personal information. Our Privacy Policy restricts the use of client information and requires that it be held in strict confidence.
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Please do not hesitate to contact us with questions about this notice.
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Posted in Clients/Clients Only, Economy, FOMC, Interest Rates, Investing/Financial Planning, Market Comments, Performance Report Cover Letter, Retirement Planning
Tagged Cover Letter, Quarterly Cover Letter, Quarterly Performance Cover Letter