Fed’s Balance Sheet Balloons

To shore up Silicon Valley Bank and the other failed banks, the Federal Reserve extended an open-ended line of credit via its Bank Term Funding Program (BTFP) and discount window borrowings. So far, this program has increased the Fed’s balance sheet equal to roughly half of the reduction done by its Quantitative Tightening (QT) program. In just one week, one year’s worth of tightening was cut in half.

Here we can see that total bank deposits had started to come down as QT played out, even before the recent bank crisis, thus reducing the money supply in the economy.

The drop in “M” in the Fisher Equation of MV = PQ points to the need for velocity to increase to offset the drop. Money, as commonly measured by the US Dollar M2 is shrinking rapidly.