Federal Reserve Base Case Analysis

Never reduce the Balance Sheet mantra

Magnelibra was reviewing the Federal Reserve report from last June, less than one year ago and here is what they said about their model predicting that,

“The model implies that a one-time permanent reduction in the Federal Reserve's holdings of 10-year equivalent Treasury securities equal to 1 percent of nominal GDP raises the term premium on a 10-year Treasury security by about 10 basis points, all else equal.” Federal Reserve June 2022

Here is the illustration they posted:

So what the Federal Reserve wants you to believe is that a reduction of 1% of GDP in 10 Year securities, is equal to a mere 10 basis point hike in the 10 year. This is the biggest fallacy that they can spin. They know this is patently false and they know this because QT works like QE but in reverse, meaning QE gets levered 10x to bid up asset prices and QT works in the opposite, destroying asset prices at a rate of 10x. This is why they raise the Fed Funds rate and DO NOT touch the balance sheet commensurately.