Thread by @MacroAlf

''The Fed is lying to us! They told us they would taper in December, but the balance sheet keeps on growing!''

And the smarter people are adding ''It keeps growing at the same pace as before!''

Seen enough of this crap, time to clarify.
No, they are not ''lying'' to us.

1/

The Fed announced it would start to taper its asset purchases from $120 bn to $105 bn per month in December.

But the Fed balance sheet size increased by $140 bn in the first 23 days of December alone!
How is this possible?

2/

As you can see, the Fed sheet is not only driven by bond purchases.

The FRBNY releases a comprehensive weekly overview (H.4.1) of the asset and liability side of the aggregate Fed balance sheet.

Nevertheless, delta in Treasury and MBS holdings move the needle the most today

3/

According to their tapering plan and given we were 3/4 through the whole December month when this update was released, the Fed should have added $78 bn in Treasuries + MBS.

Since Dec 1st, the Fed instead added $137 bn: why?

Two main reasons:

4/

1) The Fed faces substantial maturities from Dec 15 to Dec 31. As their aim is to buy additional $105 bn in December, they need to make sure they can offset redemptions AND add on top.

5/

2) If you know you are facing redemptions over a very illiquid market period, you will be front-loading purchases before Dec 23 to make sure numbers square at year-end according to your $105 bn tapered QE schedule.

This is it, really. Nobody is ''lying''.

6/6

P.S. Have a look at the liabilities side too - very interesting things happening on the RRP and TGA side of things. Link to the latest weekly release: federalreserve.gov/releases/h41/2…