Last week, the U.S. Treasury revealed that it will not need to borrow so much money for the third quarter of 2019 as it had originally forecast. This had many people scratching their heads. The reason has nothing to do with the government reigning in its spending though. Reuters demystified the mystery in a cite from a Treasury official.
His statement explained this as changes having to do with fiscal activity. The Treasury official put a positive spin on it with:
“The fiscal change related to the Fed’s plans to stabilize its massive portfolio of bonds relative to the size of the U.S. economy.”
The Treasury has reduced its estimate for borrowing because the Fed will end its program of balance sheet reduction. In layman’s terms, the Fed will stop selling off its Treasury’s holdings. Treasury released a statement claiming that it will only borrow $30 billion from April to June. This compares to their previous estimate of $83 billion worth of bonds.
The backstory is that in February The Federal Reserve Chairman Jerome Powell gave confirmation that the Fed will conclude its balance sheet reduction program sometime this year. The chairman claimed that their balance sheet will hold at 16 percent to 17 percent of U.S. GDP. This would equate to a balance sheet amounting to from $3.2 trillion to $3.4 trillion, which the graph below reveals:
This is down from their earlier peak of October 2017 when the balance sheet stood at $4.5 trillion following its aggressive three rounds of the quantitative easing program after the Global Financial Crisis. Even in September 2018, this tightening had still been set to automatic.
It only took them a month after signalling the end of the tightening of the balance sheet to begin discussing building the balance sheet back up again. The Kansas City Fed even published a paper claiming that they will need a larger amount of bank reserves in order to “properly implement monetary policy.”
In only the prior 12 months, the Fed had allowed $250 billion in Treasuries to roll off of its balance sheet. This forced Treasury to sell more of their securities on the primary market. From January to March, the Treasury borrowed around $375 billion in credit markets, per Reuters, which stated:
“In March, the Fed said it would soon begin ending a program to trim its holdings of U.S. securities. That effectively will make the US central bank a bigger buyer of U.S. Treasury securities relative to recent months.”
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Another way of explaining this is that the Fed will soon start monetizing the enormous debt of the federal government again. You remember that it was not so long ago that the former Fed Chairman Ben Bernanke promised that this would not happen again. Bernanke had pledged that Treasuries would only be temporarily on the balance sheet of the Fed. He promised to Congress that after the crisis ended, the Fed would sell off these bonds it had acquired in the emergency period. Yet the truth is that with the tightening ending, nearly all of the Treasuries and mortgages which the Fed bought in its three quantitative easing rounds will still be on their balance sheet.
The currency is on track to be debased yet again according to the Fed’s own revealed intentions. This weakens the spending power of your retirement accounts. Where can you take shelter from the currency devaluation in progress? Gold offers you a track record that no other safe haven asset can compete with today. The yellow metal has insured the assets of investors for thousands of years, helping them to rest easy in the knowledge that their valuables were safeguarded by the reliable yellow metal.
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