Today (Wednesday, July 30) at 2 p.m. Eastern time, the Fed will issue a statement on monetary policy. I don’t expect it to contain any surprises. The Fed will continue to taper by reducing its quantitative easing (QE) purchases by another $10 billion/month, bringing total purchases to just $25 billion per month.
Further, I think the Fed will stick to its plan to end QE purchases altogether by October:
| Expected monthly QE purchases | ||
| Â | FOMC | QE in $B |
| June | 17-18 | 35 |
| July | 29-30 | 25 |
| September | 16-17 | 15 |
| October | 28-29 | 0 |
| December | 16-17 | Â |
The Fed simply has no reason to deviate from its tapering plan. Normally, monetary tightening produces undesirable effects. But none of those effects has shown up yet. Stocks continue to rise. Long-term interest rates remain ultra-low. The unemployment rate is improving. And inflation—at least as the government reports it—is rising only modestly.
Naturally, the question is: how has the Fed managed to taper without roiling markets?
The answer: the Fed has printed so much money in the past few years that it can afford to take a breather. Since 2013, the Fed has been growing its balance sheet (by buying Treasuries and mortgage-backed securities) faster than the government debt has grown.
As you can see in this chart, the growth of US government debt (gold line) and total Fed assets (gray line) both exploded as part of programs to stimulate the economy after the credit crisis of 2008. The basic mechanics were that the US government borrowed money by selling Treasuries, and the Fed bought a large portion of those Treasuries with freshly printed money.
But look closely and you can see that since 2013, the Fed’s balance sheet has grown faster than government borrowing:
In essence, the Fed printed enough money to meet the demand for credit and then some—which has afforded it some leeway to taper for a little while.
