As Jackson Hole nears, it’s useful to recall how the Fed’s balance sheet has changed since end-2019 as well as contemplate how it might evolve in coming months including due to Powell’s review of the monetary policy framework = THREAD with charts from ChrisMarsh/@GeneralTheorist.
As is well known, Fed assets are now around USD7TN—up about USD2.8TN since year-end. This is due to (i) UST purchases (USD2TN); (ii) other securities (USD0.9TN); as well as (iii) central bank swaps which peaked at USD450BN (but are now below USD100BN). 
On the liabilities side, bank reserves at the Fed (+USD1.3TN) have increased a similar amount to the Treasury General Account (+USD1.2TN) since year-end, while cash has increased USD0.2TN. Or, of dollar liquidity created, less than 50% has yet reached US bank reserves.
The initial acceleration in UST assets pre-COVID was led by T-bill purchases (to USD326BN end-Mar) but was followed by an increase in other US Treasury bonds. Since mid-Jun monthly purchases have settled in around USD80BN. Should T-bills roll off? How does the Fed fill the gap?
As to liabilities, if the Treasury general account draws down to a more typical USD600BN through year-end, an additional USD1TN would be added to bank reserves regardless of the pace of Fed purchases. Bank liquidity looks set to accelerate sharply on recycling of past QE.
This is all background to Powell’s speech on Thursday on the “Monetary Policy Framework Review.” Any greater commitment to inflation targeting—average inflation etc—could bring an acceleration in asset purchases from the current pace, or stronger forward guidance (if not YCC).
But even at USD80BN per month, alongside the drawdown in government deposits, bank reserves could approach USD4TN by year-end; with a doubling of Fed purchases they would be driven higher still.
While it may be hard for Powell to surprise tomorrow, since the average inflation target is mostly anticipated now, there is still room to surprise on asset purchase announcements, likely later on (watch out for Sep FOMC...)
[see ongoing survey/poll]
[see ongoing survey/poll]
The first step would be to call it QE, rather than special liquidity for market functioning purposes. But the amounts is what the market will be looking (yield curve, USD, etc.). "or more" needs to be spelled out...
One tricky balancing act for the Fed is how it calibrates the policy stance wrt to 1) a change in long-term strategy (warrants more), 2) the US data flow (some would argue it warrants less). And how it communicates around that balancing act.
I will leave it at that. Yields are zero everywhere (except China). And monetary policy is about balance sheet policy. Hence, how the Fed ties its balance sheet to the new goal formulation will be the key in H2 2020. END
