The Balance Sheet Started Growing Again

On the twenty ninth of October last year the Federal Open Market Committee announced that the runoff of its securities holdings would end on the first of December. Quantitative tightening had removed more than 2.2 trillion dollars from the balance sheet since June 2022 and brought the securities portfolio down from about 33 percent of gross domestic product to roughly 20. The stated reason for stopping was that bank reserves were approaching what the Committee calls the ample level, below which money markets begin to misbehave.

Eleven days later the Federal Reserve began buying again. Outright purchases of Treasury bills started on the twelfth of December at forty billion dollars a month, tapering to twenty five billion in April and ten billion from May, where they remain. The New York Fed has been careful about the language, and the care is deliberate. These are reserve management purchases, and the official in charge of them has said plainly that they do not represent a change in the stance of monetary policy and should not be confused with the large scale asset purchase programs of the financial crisis and the pandemic. As of the third of September the balance sheet stood at 6.74 trillion dollars, with 4.55 trillion of that in Treasury securities and bank reserves at 2.89 trillion.

The Historical Echo

The precedent here is not distant and not ambiguous. On the seventeenth of September 2019 the overnight repurchase market seized. Rates that normally sit close to the policy rate spiked to around ten percent intraday, and the secured overnight financing rate jumped to 5.25 percent from 2.43 the previous day. The New York Fed injected seventy five billion dollars in overnight operations that day and repeated them daily for the rest of the week and well beyond.

On the eighth of October, addressing the National Association for Business Economics, the Chairman said of the balance sheet expansion that was about to begin: this is not QE. Three days later the New York Fed formally announced purchases of roughly sixty billion dollars a month in Treasury bills, described in the operating statement as reserve management purchases intended to maintain ample reserve balances over time. The terminology used in 2026 is the same terminology, word for word.

The distinction being drawn was and is a real one. Buying bills to keep the plumbing working is not the same intention as buying long duration assets to suppress yields and stimulate demand. But the balance sheet does not record intentions. It records holdings, and by early 2020 those holdings had grown by hundreds of billions of dollars on a technical rationale, immediately before the pandemic response expanded them by trillions more on an explicit one. Whatever the purpose, the reserves created were real reserves, and they did not disappear when the justification was retired.

Where Patient Capital Is Positioning

None of this argues that the Fed is being disingenuous. The reserve scarcity problem is genuine, the Treasury's cash balance is expected to grow past a trillion dollars, which drains reserves, and a money market that seizes up is a real hazard with real costs. Officials have also built in the option to pause purchases if conditions allow. The institution is doing what its mandate tells it to do.

The point for a holder of savings is narrower and does not require attributing bad faith to anyone. A central bank balance sheet that grew by more than two trillion, shrank by more than two trillion, and has now resumed growing, has demonstrated something about which direction is structurally easier. Tightening ran for three and a half years and ended when the plumbing complained. Expansion resumed within a fortnight. The asymmetry is not a conspiracy. It is the natural consequence of a system in which one direction produces a visible malfunction and the other produces a gradual and deniable erosion.

That erosion is the thing a long horizon has to be built against. A dollar held as a bank deposit is a claim denominated in units whose quantity is managed by an institution with a legitimate reason to expand it and a structural reluctance to contract it. Gold, land, energy and the industrial metals this letter examines have no such issuer. They are not better in every respect, and several of them produce nothing while they sit. What they offer is that no committee, however competent and however well intentioned, can decide there should be more of them. Over a quarter century, that turns out to be the property that matters.

The Capital Memo