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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
We all know not everybody loves central banking historical past quite like Alphaville loves central banking history. And we’ll forgive readers who really feel they’ve had their fill of Fed happenings for the month.
However for these with the urge for food, Ruth Judson and Colin Weiss, two economists working on the Fed, have dropped some cracking data plotting the historical past of their steadiness sheet again to inception in 1914.
An image tells a thousand words, so we’ll cease right here and let the chart do the speaking:
Fed steadiness sheet expansions have been a go-to coverage response to main upheavals for over a century, together with the primary world conflict, the Nice Melancholy, the second world conflict, the worldwide monetary disaster and COVID-19.
And it’s fascinating to see the function of gold through the years. Because the authors be aware:
[G]outdated certificates remained the dominant asset element and Federal Reserve gold certificates holdings grew significantly within the years main as much as WWII, as gold flowed out of Europe and into the U.S. (and Treasury and the Fed selected to not sterilise most of those inflows) [issuing dollars].
[…]
Stability of the system required the relative provides of {dollars} and gold to be such that the open market value of gold remained close to the official value of gold. Sadly, circumstances had been such that gold steadily flowed out of the U.S. to maintain the market value of gold round $35 till U.S. gold holdings had been deemed inadequate to redeem {dollars} for gold, with official convertibility of the greenback into gold at a set fee ending in 1971 and different governments letting their currencies float in 1973.
Publish-Bretton Woods there’s a protracted interval throughout which the Fed steadiness sheet kind of sits issues out, earlier than all hell breaks free with Lehman Brothers, AIG, and far of the remainder of the worldwide monetary system failing or threatening to fail. Treasuries and Company securities had been bought in dimension, and the quantity of financial institution reserves elevated correspondingly. It wasn’t till 2014 when the unwound begun:
Treasury and company securities holdings weren’t offered, however had been allowed to mature with lower than full substitute. Over the 5 years from 2014 to 2019, the steadiness sheet shrank from about 25 per cent of GDP to a bit lower than 20 per cent.
However COVID struck. So again to money-printer go brrrrrr. The steadiness sheet peaked at 37 per cent of GDP in 2021 and has been shrinking ever since.
Within the 4 years since Fed belongings and liabilities have shrunk by 14 per cent of GDP — the quickest tempo of steadiness sheet contraction within the historical past of the Fed. It will likely be attention-grabbing to see whether Kevin Warsh, the incoming Fed chair, is ready to match Powell’s tempo.
Additional studying:
— An oral history of the Fed’s Covid-19 crisis
— A history lesson on why we need central banks
— Was the Bank of Amsterdam the world’s first central bank?
— When the president wants a ‘low rates guy’
