The most recent rise in the central bank’s balance sheet, according to some analysts, is not as obviously stimulative as the one that came after COVID-19.
- The US Federal Reserve’s balance sheet climbed by $297 billion to $8.63 trillion in the week of March 15, reaching its highest level since November.
- The current Fed balance sheet expansion is not as stimulative as QE, but it has raised concerns about financial stability, which could lead to a rise in demand for bitcoin as a bank-run hedge.
Recent Balance Sheet
The U.S. Federal Reserve’s balance sheet recently increased by $8.63 trillion, which has many onlookers baffled. Despite being large, the $297 billion rise in assets is not as overtly stimulative as the central bank’s earlier quantitative easing (QE) programs. To add liquidity to the financial system and boost asset prices, including those of cryptocurrencies, QE entails the purchase of assets like government bonds and mortgage-backed securities.
Record Borrowing by Banks
To counter the confidence crisis brought on by the failure of three U.S. banks, notably Silicon Valley Bank, the recent balance sheet increase was mainly the result of banks obtaining short-term loans from the central bank. In total, banks borrowed $152.9 billion from the Fed’s discount window, $11.9 billion from the recently established Bank Term Financing Program (BTFP), and $142.8 billion from new federal bridge banks Deposit Insurance Corporation (FDIC) found for the crisis-affected institutions.
Not Stimulative Like QE
Although this expansion is not quantitative easing, it has caused financial stability concerns. The stability of the financial industry is at risk due to the record-high borrowing by banks, which indicates a concern about liquidity quickly drying up. This could raise interest in bitcoin, now considered a bank-run insurance policy.
In the meantime, as part of the quantitative tightening (QT) program that the Federal Reserve started in June of last year, the Fed’s holdings of Treasury bonds and mortgage-backed securities decreased by $7 billion and $2 billion, respectively. The Fed’s balance sheet’s net assets climbed by $297 billion, reversing months of efforts by the institution to reduce its size. Yet, unlike QE, that may only sometimes be stimulating.
CEO of Damped Spring Advisors, Andy Constan, tweeted, “The rise in the balance sheet is a transitory reflection of the runs on the several weak banks.” Constan added that “the newly announced BTFP program would create bank reserves (liquidity) that would be stimulative if people receiving the reserves made money for consumption or investment. If they keep it at the Fed, it does nothing.”
Conclusion
Some onlookers may have been perplexed by the Federal Reserve’s recent balance sheet increase, supposing it to be the start of another round of quantitative easing. Yet, the primary cause of this balance sheet increase was banks’ use of short-term loans from the central bank to address a confidence crisis brought on by the failure of three American banks. Although the balance sheet increase is not a stimulative measure like QE, it has sparked worries about financial stability, which could drive demand for bitcoin as a bank-run insurance policy. The significance of cryptocurrencies as a hedge and alternative investment may continue to increase as long as financial crises and worries persist.
