Where’s The Unwind? Fed Actually Adds $15 Billion To Balance Sheet (As “Inflation” Remains Low And Home Prices Soar)

The Federal Reserve has been jawboning their intent to unwind their almost $4.5 trillion balance sheet, nearly all of which is either Treasurys or mortgage-backed securities.

The Fed’s Balance Sheet has pretty much been on hold (treading water) since 2014 and the end of QE3, their third round of asset purchases.

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But the System Open Market Account (SOMA) report from 9/13/2017 shows that The Fed actually added around $15 billion to its balance sheet.

soma091317So, no balance sheet unwind yet.

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Remember, The Fed’s notion of inflation (US Personal Consumption Expenditure Core Price Index YoY) remains under their target rate of 2% at 1.40% YoY.

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And core CPI growth YoY is at 1.7%, also under the 2% target.

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And with asset prices such as for housing exceeding wage growth by over 2x, The Fed has quite a bit to consider before pulling the handle on the balance sheet unwind.

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The US Treasury 10Y-2Y curve slope has declined from around 280 basis points in 2010-2011 to under 82 basis points today.

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Here is inflation that is hiding that The Fed doesn’t want to consider.

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Real Median Household Income Rises To $59,345, Barely Beating 2002 and 2008 Levels (No Real Growth For Households)

According to Sentier Research, Median Household Income for May 2017 rose to $59,345.  This figure exceed the previous highs of 2002 and 2008.

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What is remarkable about these figures is that real median household income in the US has not risen since 2002.

Yet home prices rose dramatically in the 2000s only to collapse. Home prices are rising again (with the FHFA Purchase-only home price index now exceeding the 2007 bubble highs).

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No real median household income growth since 2002 yet home prices at rising at around 4% YoY in real terms.

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Case-Shiller Home Prices Rise 1% In May (5.6% YoY), Seattle Leads At 13.3% YoY

Home prices keep on rising. According to the S&P Case Shiller repeat sales index, home prices rose 1% in May and 5.6% YoY.

But the Case-Shiller home price index continues to grow at over twice that of inflation and wage growth.

The biggest winner? Seattle. The slowest growing? Cleveland, Chicago and Washington DC.

West coast home prices really took after after The Fed’s third round of quanitative easing (QE3).

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M2 Money Growth Declines To 20 Month Low (What Happens To Wage Growth?)

Real median household income, one measure of American household prosperity, peaked in 1999, fell slightly in 2000, then declined in the early 2000s only to hit decade-peak in 2007. RMINC continued to fall again until 2012 when it finally started to rise.

What is notable is that the rise in real median household income in the 1990s corresponded with a rapid rise in the M2 money supply.from 1995 to 1999. That represented a 33% in M2 money supply.

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The rapid increase in M2 Money Supply also corresponds to the high in M2 Money Velocity in 1997, as if Fed Chair Alan Greenspan expended all the M2 fuel in one massive attempt to stimulate the economy.  M2 velocity (GDP/Money Supply) has been falling ever since. Along with real median household income. EXCEPT FOR 2013 AND AFTER WHEN REAL MEDIAN HOUSEHOLD INCOME ROSE EVEN AS M2 MONEY VELOCITY WAS SINKING LIKE A ROCK.

One possible explanation lies with the redesign of the income question in 2013 and onwards.

Starting in 2013 with a partial phase-in, which was fully implemented in 2014, Census changed the questions and the methods in calculating household income.

For example, Census, starting in 2014, began to “collect the value of assets that generate income if the respondent is unsure of the income generated.”

Also, the government started to use “income ranges” as a follow-up for “don’t know” or “refused” answers on income-amount questions.

So, that is a partial explanation for the anomoly of rising real median household income with crashing M2 Money Velocity. THEY CHANGED THE HOUSEHOLD INCOME DEFINTION.

M2 Money growth has fallen to a 20 month low  while an alternative measure of money supply, the Austrian money supply, just fell to a 105 month low. 

The “Austrian” measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler’s checks, and retail money funds).

Well, M2 Money supply increases hasn’t done much for Average Hourly Earnings of Production and Nonsupervisory Employees, particularly since 2008.

Whether we are using the decline in M2 growth or Austrian money growth, neither one have benefitted the majority of Americans.