Crypto Twitter thinks the Fed’s $297 billion balance sheet expansion is ‘QE’, but it’s not
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The U.S. central bank’s balance sheet expanded by $297 billion to $8.63 trillion in the week of March 15, reaching the highest value since November.
The sharp increase has Crypto Twitter said the world’s most powerful central bank has restarted “quantitative easing” or QE, which involves buying assets such as government bonds and mortgage-backed securities to inject liquidity into the financial system. QE initiated after the 2008 crash and after the coronavirus pandemic-induced crash in March 2020 expanded the Fed’s balance sheet by trillions and stimulated asset prices, including cryptocurrencies.
However, the recent expansion of balance sheets stemmed mainly from banks borrowing short-term loans from the central bank to deal with the crisis of confidence triggered by the collapse of three US banks, including startup-focused Silicon Valley Bank.
“QE increases the balance sheet for monetary purposes. This is about financial stability, and any expansion of the balance sheet is not QE,” Marc Chandler, market strategist at Bannockburn Global Forex and author of the book “Making Sense of the Dollar” told CoinDesk in an email .
Official data shows banks borrowed a record $152.9 billion from the Fed’s discount window. The central bank’s lending facility provides loans to institutions, helping them manage liquidity risk and avoid bank runs.
The banks also borrowed $11.9 billion from the newly created Bank Term Funding Program (BTFP), a liquidity lifeline for banks that guarantees loans with holdings of US Treasuries. This is also not free money as borrowing banks must pay interest defined by the one-year overnight index swap (OIS) rate plus ten basis points.
Finally, $142.8 billion was lent to the new bridge banks created by the Federal Deposit Insurance Corporation (FDIC) for the troubled Silicon Valley Bank and Signature Bank.
Meanwhile, the Fed’s holdings of government bonds and mortgage-backed securities fell by $7 billion and $2 billion, respectively, as part of the central bank’s quantitative easing (QT) program launched last June.
All told, net worth on the Fed’s balance sheet increased by $297 billion, undoing the central bank’s efforts to shrink its balance sheet for months. But it is not necessarily stimulative like QE.
“The increase in the balance sheet is a temporary reflection of the runs at the various weak banks,” Andy Constan, managing director of Damped Spring Advisors, said in a tweet thread.
Constan added that bank reserves (liquidity) created by the recently launched BTFP program would be stimulating if those receiving the reserves create money for investment or consumption.
“If they keep it at the Fed, it doesn’t do anything,” Constan noted.
Having said that, the record borrowing by the banks signals a fear that liquidity will dry up quickly, a risk to the stability of the banking sector. That could increase demand for bitcoin, which is now seen as a hedge against bank runs.
