The Fed’s Stated Policy and Its Revealed Policy Are Not the SameThe $189 Billion Nobody Is Discussing Quantitative tightening ended in December 2025 after reversing only half the pandemic-era balance sheet growth. The Fed said it would buy short-term Treasuries to keep reserves adequate. Simple plumbing. But plumbing has a price. Since that pivot, total assets grew from roughly $6.55 trillion to $6.74 trillion. Treasury holdings alone rose $275 billion over twelve months even as MBS declined $176 billion through passive runoff. The net: the Fed is adding Treasuries faster than it is losing MBS. The balance sheet is growing during what the Fed calls a restrictive regime. What the Term Premium Says During QE, the balance sheet compressed long-end yields. During QT, the reverse. Now the Fed is growing the balance sheet while the 10-year sits at 4.49 percent and the term premium has returned to 2023 levels. Our view: the curve is pricing two things simultaneously. The front end prices a hawkish Fed. The long end prices a balance sheet that is quietly loosening conditions. If you hold duration, you are betting on which policy wins. The Warsh Paradox Warsh has been the loudest balance-sheet hawk in a generation. At Sintra last Tuesday he said the quiet part: “It took us about 18 years to find our way into this big balance sheet. It’ll take us more than 18 weeks to bring it down to size.” In this tape, the most hawkish chair in memory presides over a balance sheet that is getting larger. He says rate-setting is the primary tool. Balance sheet reform requires study groups, consensus, public discussion. That is years, not quarters. The 2019 repo crisis taught the FOMC what happens when reserves drain too fast. Where the Capital Reads It Gold posted its best week in two months after Thursday’s 57,000-job print. Central banks added 41 metric tons to reserves in May. The dollar had its worst week since April. All three moved as though easing is coming. But fed funds are still 3.50 to 3.75 percent and Warsh has not signaled a cut. Worth watching: FOMC minutes from the June meeting release Wednesday, July 8. If the minutes show any internal debate about the balance sheet path, the term premium reprices by Thursday. What Monday Opens To Markets reopen Monday into a shortened week. Tuesday brings the SpaceX Nasdaq-100 inclusion and $27 billion in forced passive buying. Wednesday brings the FOMC minutes. Both arrive into a market that just priced out half the September hike probability on one jobs report. The rate market moved. The balance sheet did not. |