Historic Federal Reserve lending to banks in the wake of Silicon Valley Bank’s collapse punched a huge hole in its effort to shrink the size of its balance sheet, though economists don't view that turnaround as a shift back toward a stimulative use of its asset stockpile.
Instead, the rapid expansion of the Fed's holdings of cash and bonds has emerged as a key tool to help contain financial stability issues, speaking to the core mission of why the central bank was founded just over a century ago.
Evercore ISI analysts pointed to the seeming contradiction of an expanded balance sheet driven by financial stability concerns happening as monetary policy tightens, and noted there is "rarely a perfect separation between financial stability and monetary policy goals. Messy real world policymaking needs to embrace this.
That puts the central bank in a seemingly awkward position. While the banking sector’s woes have generated considerable uncertainty into the outcome of the rate-setting Federal Open Market Committee meeting which concludes Wednesday, the Fed nevertheless appears on track forThe details of Fed holdings matters greatly in terms of understanding Fed balance sheet dynamics, analysts say.
Tim Duy, chief U.S. economist with SGH Global Advisors, agreed and said the Fed emergency lending is “not funding that's going into banks that they can make loans with per se,” a key factor blunting any form of new stimulus.
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