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Fed’s Powell Admits a Bigger Bailout for Wall Street Is Coming; Fed’s Balance Sheet Ballooned by $176 Billion Since September

Courtesy of Pam Martens

Federal Reserve Chairman Jerome Powell Speaking at the National Association of Business Economists on October 8, 2019

Federal Reserve Chairman Jerome Powell Speaking at the National Association of Business Economists on October 8, 2019

Yesterday, at a speaking event in Denver at the National Association of Business Economists, Federal Reserve Chairman Jerome Powell acknowledged that a larger, long-term bailout of Wall Street is coming. His two key points were buried in a subterfuge of puffery but came across loud and clear: “…my colleagues and I will soon announce measures to add to the supply of reserves over time.” And this: “As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves. That time is now upon us.”

Let that final statement sink in for a moment. Under the previous Federal Reserve Chair, Janet Yellen, balance sheet normalization at the Federal Reserve meant reducing the Fed’s unprecedented $4.5 trillion balance sheet to get back to something near pre-crisis levels. Under Powell, normalization now means increasing the Fed’s balance sheet to as yet undefined heights.

The Fed’s balance sheet had been bloated to the unprecedented level of $4.5 trillion by buying up bonds from Wall Street’s teetering banks during the financial crisis. The Fed likes to give its Wall Street bailouts fancy names to disguise their real purpose. This one was called Quantitative Easing or QE. From November 2008 until October 2014, the Fed deployed three rounds of QE – QE1, QE2 and QE3. The final one was known on Wall Street as QE-Infinity since it appeared to be open-ended.

On January 7, 2008, the Fed’s balance sheet stood at $881 billion. By 2015 and three rounds of QE it had spiraled out of control to $4.5 trillion. Yellen started her normalization program to shrink the Fed’s balance sheet in October 2017 by eliminating rolling over the Fed’s maturing Treasury securities and principal payments on agency mortgage-backed securities that the Fed had bought up from Wall Street banks. Powell’s Federal Reserve stopped that runoff this past August. The Fed is back to reinvesting its maturing bonds into new bonds to once again balloon its balance sheet.

On top of that, beginning on September 17 of this year, the Fed has been funneling hundreds of billions of dollars a week in revolving loans to Wall Street securities firms (primary dealers) by intervening in the repurchase agreement (repo) market. Between September 11 and September 30, the Fed’s balance sheet has exploded by $176 billion – in just 19 days – to a total of $3.9 trillion. (See graph below from the Federal Reserve.)

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