Thread by @dampedspring

This chart Should not be new to anyone that has my work since 2022. @SteveMiran used and credited my work to write his paper on ATI which probably helped him get the Fed Governor Gig😅.I have presented my work to many Fed staffers and senior treasury officials many times. BUT 🧵

https://twitter.com/lukegromen/status/1978250481941037223

The Fed bears only partial responsibility to the muting of QT. QT impact is two fold reducing reserves HAS occurred. Though not much and mostly just reduced pseudo reserves in the form or RRP reduction to zero.

BUT by far the biggest impact of QT is the forcing of the private

Sector to absorb duration. As written in my DSR of 3/14/2022 before QT had even formally been announced I described how choosing runoff vs outright sales when implementing QT was handing monetary policy to the treasury. dampedspring.com/wp-content/upl…

Janet knew the power she had and exercised that power when it suited her. Jay Powell was complicit in this power shift and the FOMC has continued to enable the treasury to maintain easy financial conditions TO THIS DAY

Scott Bessent continues to control the monetary impact of quantitative tightening as we speak. The impact has been hugely beneficial to asset holders (the wealthiest amongst us) and has come at the expenses of this without assets who have lived with almost 5 years of above

Target inflation which shows literally zero signs of returning to target in the coming year or even two.

The Fed is responsible for the original sin of choosing runoff over outright assets sales. But the treasury even to this day is the one responsible for the monetary impact

The fed is also responsible for its reinvestment policy which as the OP (and many of my reports shows has resulted in long term treasuries accumulating by 200BN when we have been told the balance sheet has been shrinking. We haven't been lied to. This was obvious 3 years ago

It's occurred in the bright light of weekly data. I had many conversations with fed staff about this. My DSRs are sent to the fed by request. I had great hope after the January Fed minutes that they would act and at least correct the reinvestment program. See the whole impact here

Not only that I had made concrete recommendations for the Fed to seize control of monetary policy as far back as 14 months ago dampedspring.com/wp-content/upl…

The full report from 7/28/2024 is here
dampedspring.com/wp-content/upl…

The big deal though is the Fed simply enabled the ongoing monetary policy by the treasury with its reinvestment policy. How you may ask? Every quarter the treasury show us the ongoing grift

Notice the ironically gold colored line. It shows that the treasury weighted average maturity of its total debt is at a fairly long level. Implying that the treasury has done a good job "terming out the debt"

But it's a lie. Because the Fed has bought long dated treasuries the private sector didn't have to. The blue line represents the private sector owned WAM which shows that the private sector hold very little WAM relative to what's been issued.

We all know this is true as buried in the linked reports we know that private sector coupon auctions have remained fixed and beginning the moment QT started Janet issued half of all private sector purchased debt in bills. She could and did (and the current treasury secretary

Continues to) tell us that the government debt is responsibly extending when The Fed's ridiculous reinvestment plan is the entire reason for the extension. So the treasury department is desperately afraid of the Fed changing its reinvestment policy because it will make the grift

Visible to all. It "should" be visible to all already but somehow no one seems to care.

Here's the big deal. IF the Fed finally stops enabling the treasury grift by stopping buying coupons greater than 5 year the treasury will HAVE to sell those bonds not bought be the Fed

To the private sector. That would mean a substantial increase in auction sizes of coupon treasuries. Fwiw those auction sizes need to go up a lot anyway and so because we increase debt 2TN per year but this reinvestment policy shift would significantly compound the issue.

Janet Yellen is long gone. Jay Powell says talking about the balance sheet is worse than going to the dentist. OF COURSE it Is. Truth is painful.

He and @scottbessent701 are likely to agree to NOT change the reinvestment plan continuing the grift

And certainly Jays replacement will do be even more amenable to things that prolong asset performance and fail to control inflation.

The answer is so simple and yet policymakers won't act because they fear the bond market

Change the reinvestment policy to only buy 5 year bonds and shorter

Increase auction sizes to offset this "terming in". The private sector can absorb the issuance and the price won't be a disaster BUT assets may detox a bit.

Blame Jay and Janet all you want but be prepared

Bessent and Miran are even better at this than Jay and Janet and their incentives are NOT to detox the markets.

Fwiw the fucking dentist joke by Powell today was just too much. 70% of the FOMC and the chair either doesn't understand monetary policy or simply is too afraid of the bond market. Instead they avoid the pain of understanding. Or intentionally grift.