The Fed's Ultimate Balancing Act

Summary

• Until rates are raised and/or excess reserves are no longer remunerated and mopped up completely, the banks have no reason to engage in the business model of lending.
• Leaving the central banks in a gravitational liquidity vortex and conundrum of their own creation which they plan to clean up with IOER and RR.
• We are about to witness a tight rope walk or balancing act of epic biblical and Houdini-esque proportion by the Fed.

From Salmo Trutta: "The un-winding of the Fed's balance sheet, or the size of its assets and liabilities, is a subordinate objective, likewise the volume of ERs (excess reserves). The Fed can't manage the money stock, and therefore AD (aggregate demand), using interest rates, the Fed's transmission mechanism (has never worked). Keynes' liquidity preference curve (demand for money), is a false doctrine. The Treasury-Federal Reserve Accord of March 1951 should have established the validity of that dictum...

If the BOG continues using the remuneration rate, R-gDp's trajectory will again decelerate (probably to depression era levels), as savings (deposits held beyond the income period in which received), will be further impounded within the confines of the CB System (added to the NICA leakages, i.e., increase the volume of idle, un-used savings thereby redistributing income upward and lowering the overall standard of living of the vast majority of Americans)."

The FED balance sheet is the largest ever, full of assets/securities purchased during three rounds of QE & Operation Twist. The institutions (notice I did not say banks) are full of excess reserves as a result of these purchases and IOER.

If the FED attempts to reduce the balance sheet...  

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