On Wednesday March 19th, the Fed said it was keeping interest rates high, but more importantly, the Fed also announced that it is going to let $5 billion per month of treasury bonds mature rather than the prior rate of $25 billion. What does that mean?
Let’s see if I have this right. Before they were letting $25 billion a month mature, which means that the Fed was not refinancing $25 billion a month – which means not reissuing those bonds.
This is confusing so let me see if I can break down to farmer math. When the Fed reissues bonds that come due, that means it puts bonds out in the market, which means taking cash into the Fed to hold. That also means that by taking cash into the Fed, the Fed is reducing the money supply, because it’s taking cash out of the market.
Let’s see if we have this right. If the Fed refinanced $25 billion a month (“letting the bonds mature”) that would mean issuing new bonds to replace the old, which in turn means taking the cash into the Fed, rather than letting that cash remain in the market.
Now comes the hard part. By refinancing less, $5 billion instead of $25 billion, it means that the Fed is going to refinance $20 billion ($25 b – $5 b = $20 b) a month. That’s a shift of $20 b x 12 months = $240 billion that the Fed is going to now refi, which means issuing new bonds, which means vacuuming that cash up into the Fed to hold rather than it being out in the market.
Effectively, the Fed is now reducing the money supply. Why? Less cash in the market place means less cash for the private sector – for financing new projects, new manufacturing plants, finance growth and the like. (Of course, the Fed doesn’t remind Americans that it is issuing $1.8 trillion in new bonds to vacuum up cash from the market, just to cover the interest on the national debt this year.)
So now I ask you, why is the Fed doing this? Good question. They’re keeping interest rates high and now they are reducing the money supply. Hmm, funny thing, they didn’t do that during Biden’s spending binge, but now while Trump is trying to cut government spending and increase tariffs to increase revenue to the government and reduce foreign tariffs on American goods, the Fed is now deliberately operating in opposition to the Trump administration’s goals.
Tightening the money supply could cause a recession. It is $240 billion a year after all. Another problem I have with the Fed is that it is trying to predict the economy over the next year and then change its monetary policy to try to influence the economy. That’s NOT the Fed’s job.
The Fed’s job is to provide a stable money supply and stable interest rates. It’s job is not to control or manage the economy.
All their actions contributed to the massive national debt of $37 trillion during Biden, but now they operate contrary to Trump who is trying to clean up this mess. I really have to question their motives. If anything the Fed should be putting more cash out there into the market – and continue to reduce the amount of Fed owned bonds on its balance sheet.
And the backwards talk – how they talk about only letting $5 b a month to mature instead of $20b, rather than just telling us straight up what they are really doing – i.e. just say it – the Fed is going to reduce the money supply by issuing more bonds rather than paying them off.
Very suspicious.
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