In a Mises Institute article titled “Easy-Money Policy Accelerates as the Fed Freezes QT and Lowers the Target Interest Rate”, Ryan McMaken explains how the Federal Reserve is ending its “quantitative tightening” (QT), or reduction of its balance sheet.
It’s not necessarily shifting to a period of “quantitative easing” (QE), but it’s going to at least maintain its balance sheet.
After the collapse of the housing bubble and 2008 financial crisis, the Fed basically tried to reinflate the bubble by massively inflating the money supply—including by purchasing mortgage-backed securities (MBS).
There was massive QE again during the lockdown insanity, but for a few years now, the Fed has tried to unwind some of that by allowing a reduction in its balance sheet as maturing assets are rolled off.
Now, however, the policy is shifting again, and the Fed is going to maintain its balance sheet.
The way it’s going to do so is by allowing mortgage-backed securities to roll off while increasing the proportion of US Treasury securities.
In this video, Joe Brown explains how this will put upward pressure on mortgage rates:
Despite an ongoing housing affordability crisis, as the title of Brown’s video states, “The Fed is Sacrificing the Housing Market to Bail Out the Government”.
To reiterate, the Fed is shifting the proportions of its balance sheet away from mortgage-backed securities (MBS) to US government IOUs (Treasurys).
To add to its balance sheet, the Fed purchases assets with dollars created out of thin air. When the debt instruments mature and are paid off to the Fed, those dollars return to the void from whence they came.
That is how the Fed increases or decreases the currency supply. Typically, it’s a constant steady increase, or monetary inflation. But the manipulation of the currency supply one way or the other is not the aim—it’s rather the means to an end.
The Fed can reduce its balance sheet by not creating more dollars to buy more assets to replace those that run off. The result is a decrease in the money supply. This is known as “quantitative tightening”, the opposite of “quantitative easing”.
Having already massively increased the money supply after the 2008 financial crisis, the Fed facilitated the authoritarian lockdown madness, a government policy of deliberately shutting down the economy, by creating trillions of new dollars out of thin air.
That resulted in the painful price inflation everyone’s been feeling—including in the housing market.
I explained that in more detail in my October 2024 article “Kamala Harris’s Economic Ignorance and the Housing Affordability Crisis“:
After periods of the Fed massively expanding its balance sheet, like after 2008 or during the 2020 lockdown insanity, there was this illusory idea that the Fed would “unwind” its balance sheet to resume “normalcy”.
The price inflation, we were also told throughout 2021, would just be “transitory”. Nothing to worry about!
But the massively increased money supply—and hence the painful price inflation—in reality just became the new “normal”.
This happens because, contrary to the delusion, the Fed is incapable of unwinding its balance sheet without allowing the market to fix itself from all the harm the Fed has done.
That painful period of market correction is known as a “recession”.
We’re supposed to believe that the recession is the problem, and we need the Fed to prevent or cure it.
The truth is that the Fed is the problem, and the recession is the cure.
The Fed’s conundrum is to try to keep the rate of increase in prices under control while also fulfilling the function for which all central banks exist—to enable government spending without direct taxation by effecting an upward transfer of wealth from the masses to the politically and financially elite.
When you directly tax people, they know about it and protest—even rebel against it. When you defraud them by stealing the purchasing power of their dollars, by contrast, most of them have no understanding of the fact that they are being robbed.
Sure, they know that they are paying higher prices at the store. But they perceive this as prices going up due to whatever bogus explanation they are given instead of what it really is—the theft of their purchasing power.
And they’re told “inflation” means an increase in prices for consumer goods, but the consequences of monetary inflation can also show up in capital goods, stocks, and the housing market.
That’s what caused the 2000s housing bubble that precipitated the 2008 financial crisis.
With its latest policy shift, the Fed is no longer going to allow a continued reduction of its balance sheet. “QT” is ending.
But when mortgage-backed securities roll off the balance sheet, instead of creating more dollars to buy more MBS, it will utilize those legal fictions to buy more Treasurys.
The proportion of MBS on the balance sheet will shrink while Treasurys grow.
The Fed’s purchase of government IOUs creates artificial demand for the debt instruments, which creates an illusion of greater confidence in the government’s ability to repay that debt than would otherwise exist in the market.
If people lose confidence, they stop buying Treasurys. Lower demand leads to lower prices in the secondary market, which increases the yield, or the real rate of return, in contrast to the nominal interest rate attached to the the IOU.
For instance, an IOU with a face value of $1,000 at 3% interest might be purchased for $950—at a discounted price. But the owner of that IOU still gets an annual rate of return of 3% against the face value of $1,000. So, the investor has a greater yield.
Basically, lower prices equal higher yields, and higher prices equal lower yields. It’s an inverse relationship.
So if an investor can buy a bond with a face value of $1,000 and 3% interest rate for $950 on the secondary market, there is no incentive for him to buy a newly issued government IOU for the full price. To pay $1,000 for the IOU, he would demand a higher rate of return than 3%. The interest rate must go up.
With higher interest rates, it becomes harder for the government to sustain its debt, resulting in even less confidence in its ability to repay, resulting in even lower prices and even higher interest rates, until the government must simply default.
Hence, by creating dollars of out thin air to buy government IOUs, the Fed is helping to keep the government’s interest payments lower—which helps to sustain confidence in its ability to repay in a negative feedback loop.
Ultimately, because it is all illusory, it is also unsustainable, and there are always costs in trying to sustain the illusion—a confidence game in the most literal sense. It’s a con, a scam. It is legalized counterfeiting.
And just because it’s the Fed doing it doesn’t fundamentally alter the nature of the crime. It is theft perpetrated without detection via sleight-of-hand.
You’re being incessantly pickpocketed by the government and its creature from Jekyll Island.
Central banks exist to defraud us all of our wealth so those in positions of power can utilize government force to expropriate our wealth—by force or fraud—to redistribute the scarce resources according to their whims, rather than us choosing how best to utilize our own money.
They want you to think that they know better than you how your dollars ought to be spent.
Do not believe them.
Any American struggling to realize the dream of homeownership ought to know better by now.
And anyone who already decided to buy a home recently based on the assumption that they could soon just refinance after rates come down may also be about to learn the lesson the hard way.
To learn how the Fed blew up the 2000s housing bubble in the first place with its policy of pushing interest rates artificially low, read my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian Economics in the Financial Crisis.
“Any work of economics that can make you laugh is at least worth a look. If in less than 100 pages it also informs you about a subject of great importance, it might just qualify as a must-read. Jeremy Hammond, a political journalist self-taught in economics and a writer of rare skill, has produced such a book…. This short work conveys more insight into the causes and cures of business cycles than most textbooks, and more about the recent business cycle than most volumes of much greater length.”
—Barron’s
