Fed Continues To Add Liquidity Behind The Scenes

A couple of months ago, I highlighted the odd way the Fed has been flattening the yield curve and jawboning about increased inflation risks while, at the same time, adding liquidity through its permanent market operations.  In hindsight, this dichotomy could be explained by the Refco implosion.  I believe the Fed had a heads up that Refco was in trouble and began adding liquidity to keep the market from seizing up. 

The only problem with that rational explanation is that the Fed has continued on a similar path of taking with one hand and giving with another.  It continues to add liquidity through a significant number of permanent market operations (the red bars)...

   

Source:Bullandbearwise.com

....while at the same time threatening to invert the yield curve with continued rate hikes.

Perhaps in hindsight we'll understand the reasons for the Fed adding so much liquidity but in near term it doesn't make much sense.  Once again the Fed appears to be talking tough but acting much more benign in the background.  And that might be one of the reasons for the strong equity markets and the rally in gold. 

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