Fed Has Already Changed its Policy Due to Inflation, Market Gambling Fears - Dick Bove

May 12, 2021 9:43 AM EDT

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While markets anticipate a potential Fed tapering announcement over the coming months, the Fed has already changed its policy based on the positioning of its balance sheet, Odeon Capital bank analyst Dick Bove notes.

Bove highlights that the Fed's key holdings of Treasuries and Mortgage-backed securities are no longer growing at the same pace.

"The result is a significant decline in the growth of the money supply as shown in the growth of bank deposits," Bove notes. "This is a clear indication of change – a change that, possibly, is being driven by fear of inflation or of excessive speculation (gambling) in financial markets."

"The implication one must draw by reviewing the Fed’s balance sheet is that the agency has made a policy decision to pull back from the aggressive support that it has been providing the financial system and the economy. In fact, if the Fed were not under the control of the United States Treasury, one might imagine that it would be pulling away more sharply at this time," he added.

Bove highlights that 92% of the Federal Reserve’s assets are Treasuries (64.1%) and mortgage-backed securities (27.9%). In both cases, the Federal Reserve has slowed the growth of these two portfolios. In fact, in recent weeks the MBS portfolio actually topped out and is beginning to shrink, Bove highlights.

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