As usual, the focus went to the exact wrong place. In most people’s minds, the idea hammered home by the uniformly compliant financial press, it’s all about inflation and accommodative Federal Reserve policy. According to the current popular breeze, this along with Uncle Sam’s uncontrollable check-writing vigor has put the economy on course to overheating if not drastically so.

Didn’t you see last month’s gargantuan CPI?

Thus, what’s in demand is simply confirmation that the so-far reluctant monetary accommodators see the same thing. Up to this point, Jay Powell and gang have been steadfast. Whatever is happening in the CPI like the PCE Deflator, it won’t last very long (just like it didn’t last last time we did this which just so happened to be last year).

This is not what the inflation narrative needs to hear. With so many real questions swirling, those inconsistencies becoming harder to ignore by the day, the conventional case absolutely demands Powell’s policymakers come back over to the inflation side where they both belong and had (mistakenly) been for so many years before COVID.

In strict monetary policy terms, the media went hunting for anything resembling the possibility of “taper” in the latest FOMC minutes released today (pertaining to the prior meeting held last month). This sanitized summation is hardly the place, if for no other reason than its very purpose; to make it seem like these presumably objective monetary scientists are carefully considering all available data, information, and every plausible interpretation drawn therefrom.

Given this, of course “taper” showed up in the April minutes because the world (read: just the media) went nuts for that month’s inflation figures. Even though those latter weren’t released until this month, they were bound to be big regardless. Anticipating it, the FOMC minutes include the obligatory inflationary red meat:

A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.

Oh my, the frenzy. Like Bernanke in 2013, the word “taper” itself doesn’t appear if only because it doesn’t have to. The message here was received loud and clear.

Was it really worth so much fuss?

This is nothing new; at times like these, reflationary times, policymakers make the same statement. If things go well, the Fed adjusts. That was the same thing the FOMC said repeatedly throughout 2018, only that time they actually intended to act (though they never needed to because it was all wrong).

What was actually new in these minutes, and far, far more noteworthy as well as relevant to the reasons why there hasn’t been inflation – and not likely to be, judging by bonds and yields – was where Jay Powell and crew really blinked.

Abundant reserves.

The big one, so far as conventional policy and the convention written up surrounding it. I’ve personally written about reserves so many times I can actually feel your eyes roll all the way into the back of your head each time when any of you open up our website and find my latest has been written on this same stupid topic yet again. I’m very much aware of how it appears as not just déjà vu, it comes off as mindlessly obsessive.

Obsessive, yes, but far from mindless. Quite reasonably, bank reserves deserve the constant refutation, sitting as they are at the heart of this gross misconception causing so much misery.

There absolutely had been abundant reserves during the worst of the 2008 crisis. The fact that it didn’t make a lick of difference should have been everyone’s first clue. Abundant reserves only grew more abundant still into 2011, yet 2011 turned out to be perilously too much like 2008 had been.

There were abundant reserves yet again during the March 2020 repeat crisis – as if we needed still more proof. Something instead about T-bills.

In each of these cases, as well as others I haven’t listed, it had become very clear how there hadn’t been enough collateral. Reserves were largely irrelevant and the world has suffered immensely for it. “Money printing.”

When I refer to Jay Powell having blinked in these April 2021 minutes, I did not mean with regard to that nothing “taper” clause in their statement. Instead, what I’ve quoted below is the only thing that mattered in any of the prolonged FOMC text, and it echoes through past time past today and will reverberate well into the future:

Nearly all participants commented that a standing repo facility, by acting as a backstop, could help address pressures in the markets for U.S. Treasury securities and Treasury repo that could spill over to other funding markets and impair the implementation and transmission of monetary policy. In this regard, a number of participants noted the potential for pressures in short-term funding markets to arise from time to time, even with monetary policy operating in an ample-reserves regime. [emphasis added]

“…even with monetary policy operating in an ample-reserves regime.”


Think about this for a moment, and then think about the Fed writing it out. Everything about the monetary system since Econ 101 has been bank reserves, bank reserves, bank reserves. Suddenly, hey, maybe there’s more going on. Maybe?

Forgot about the absurd standing repo facility (recalling instead how useless and ineffective it had been from late February 2020 right on through to the end of March), these people just admitted, in public, in writing, that maybe, possibly bank reserves, hugely abundant bank reserves, perhaps these are not the endpoint of systemic “liquidity” therefore effective money we’ve let the world think they’ve been.

Money is, in fact, much, much more complicated and even these empty suits are now ready to confess it just might have something to do with – among other things the Fed’s yet to discover – “Treasury repo that could spill over to other funding markets.” Just wait until they gaze thoroughly upon “securities lending.”

On the one hand, no sh–. On the other, it’s such a baby step into this wider world that had first opened so wide more than half a century ago.


With only a partial understanding here, of course they go on to get the rest absolutely wrong (including any positive thoughts whatsoever about their standing repo facility at whose end lies…even more bank reserves).

Powell blinked and it does mean inflation, too, just not in the way it’s being described about “taper.” Instead, the FOMC minutes admit that regardless of how many bank reserves there remains a non-trivial potential for systemic non-trivial real money problems. Thus, deflationary factors would obviously remain which would contribute, as they have for nearly fourteen years, to the lack of inflation.

You’re sick of reading about bank reserves and believe it or not I’m positively exhausted for having ripped them up for so long. The reason for it is that these accounting byproducts have occupied an unearned pedestal in the presumed money hierarchy if only because they’ve been placed there by a wholly incomplete (grossly outdated) worldview.

Bank reserves had been the star of the puppet show. Almost a decade after making the statement, it’s time to go back one more time to 2011, repo, and FOMC puppet master (Open Market Operations Director) of the time Brian Sack.

MR. SACK. Can I add a comment? In terms of your question about reserves, as I noted in the briefing, we are seeing funding pressures emerge. We are seeing a lot more discussion about the potential need for liquidity facilities. I mentioned in my briefing that the FX swap lines could be used, but we’ve seen discussions of TAF-type facilities in market write-ups. So the liquidity pressures are pretty substantial. And I think it’s worth pointing out that this is all happening with $1.6 trillion of reserves in the system. [emphasis added]

Ten years – TEN! – just think of all the incalculable financial, economic, and now political (see: Chile) damage done in between, and all because of “abundant reserves.”

Reserves have indeed been abundant. But what they have not been is money. There have been ample reserves in Fed policy, it’s just that Federal Reserve monetary policy has for decades been moneyless obsessed with only bank reserves. Jay Powell didn’t come right out and say it last month; he didn’t really have to, at least not to anyone paying attention, the evidence has been utterly overwhelming for a very, very long time.

Since hardly anyone has been paying much attention, dazzled by the spectacle of QE “money printing” up bank reserves, this was really was huge.

Taper, ha!