Money Still Getting Tighter

Federal Reserve is still sucking up base money.

Today, we have a quick look at base money at the Federal Reserve. It took another step toward tightening last week.

Total Assets at the Federal Reserve have been gliding lower, part of the $47.5 billion/month “Quantitative Tightening” that began in June, rising to $95 billion in September.

The Reverse Repos, which I expected to be drawn down to cancel out (“sterilize”) the QT drawdown, instead have climbed higher.

The Treasury balance has been drifting lower, after a big jump due to April 15 tax payments. This is as expected.

Currency in Circulation has drifted higher. This is normal.

The result of all this is that Bank Reserves (commercial bank deposits at the Federal Reserve) have taken another step lower, and are now down about $1.0 trillion from their prior highs.

This is, on balance, USD-supportive, and goes some way to indicate why the USD has not lost much value vs. gold in recent months, and why the USD has outperformed other major currencies including the EUR and JPY.

Continuing this process of base money (and specifically, bank reserve) contraction should continue to be USD-supportive, and may lead to a break of USD/gold below important trendline support around $1800.

Some significant turn in Fed policy towards an easier stance, AKA the “Fed Put,” would be favorable for gold vs. USD. But, for now, and with the Fed under more pressure to “do something” about “inflation” rather than “unemployment” (the Fed’s “dual mandate”), it appears the Strong Dollar trend will continue.