Yesterday Jerome Powell delivered his last FOMC press conference — and he didn't say a word about the balance sheet.
Not in the prepared remarks. Not in the Q&A.
Remember, in December the Fed ended its quantitative tightening program (shrinking the balance sheet/withdrawing liquidity from the system) and days later restarted another iteration of expanding the balance sheet/adding liquidity to the system (QE that the Fed wraps in different terminology).
Since then, the Fed has bought $170 billion of Treasuries. And remember, when this program kicked off, Powell also said this: "there's a secular ongoing growth of the balance sheet. And that alone calls for us to increase about $20-$25 billion per month."
So, it's ongoing. Indefinitely.
Now, this is in direct contrast with what Kevin Warsh, the incoming Chair, has said publicly about the balance sheet. It needs to shrink.
So, the departing Fed Chair says QE forever, to maintain ample reserves in the financial system. The incoming Fed Chair says the opposite.
One would think this would prompt some questions by the army of financial journalists in the room yesterday.
Not a peep.
Meanwhile, the same Fed that is quietly easing through the balance sheet, spent time debating the easing bias language in describing the path of interest rates. Three wanted it removed.
So, some were more hawkish on rates, but somehow fine with pumping $40-$50 billion a month in fresh liquidity via the balance sheet.
And with all of the discussion about the inflationary pressures in the economy, none were attributed to the Fed's asset purchases.
So, why are they doing it?
Is the departing Fed Chair pre-loading dollar liquidity for his global central bank friends, knowing that the incoming Fed Chair will no longer provide such liquidity without conditions (i.e. requiring alignment with the United States on policy)?
Maybe.
Consider this: Since the Fed restarted balance-sheet expansion in December, Europe has accounted for 98% of dollar swap-line usage.
Clearly dollar liquidity in Europe is a pressure point. That's why European leaders have been openly concerned about this Fed regime change over the past few months, and have even talked about "pooling" dollar liquidity from other central bank partners around the world.
That said, when ECB President Christine Lagarde was asked this morning about the liquidity situation, she said, "we still have an abundance of liquidity."
Better to watch what they do, not what they say.
