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Is Fed Balance Sheet Bump Over?

It’s been almost a month since the banking crisis created a sudden panic. It led to swift actions by central banks to contain the risks. Federal Reserve took the lead yet again. But the focus this time was to save deposits and avoid a bank run. For this to happen they introduced a special program called Bank Term Fund Program( BTFP).

This measure with others has worked for now as the deposit slide has reduced but there would be a certain deposit shift that would place in quarters to come. This would result in small & medium banks losing to bigger banks.

This action has resulted in an increased Federal Reserve balance sheet by $363 Bn within three weeks of the crisis. Bringing back the balance sheet size to October 2022 levels. This also resulted in US equity markets rallying by 6.3% within the same period.

The important thing to note is that within the last week of March, the same balance sheet has already started to reduce. The decrease amounted to $27 Bn almost the same 4-week average reduction that was happening before the crisis.

Does this mean that sentiment and algorithms interpreted the temporary increase as a reversal of policy? The actual interpretation will be more clear after a few weeks of data. But the thing that is sure for now is that the coming quarters will be more volatile and financial stability will be more delicate.


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