True to form, the Federal Reserve is taking a rather cautious approach to their balance sheet unwind with this week’s System Open Market Account (SOMA) report showing an INCREASE of a $million in the Fed’s bloated account holdings. So much for unwinding!  If you were wondering how equity markets could be marching to new highs every week in the face of tepid organic economic growth, you have your answer.

Today’s inflation numbers show that the Federal Reserve still can’t seem to generate any inflation in the economy, with core inflation rising only 1.8% year-over-year. Home inflation in the form of Owner’s Equivalent Rent rose 3.2% while home prices are growing at about 4 times core inflation.

So what is the Fed doing successfully? Well, blowing asset bubbles of course, and paying gobs of money in free interest payments to US and foreign banks, to the tune of about $26 billion! As the Fed has continued hiking rates, the interest payments to US and foreign institutions sitting on that pile of excess of reserves has soared. In 2017 the windfall was rather substantial indeed. With the interest rate on excess reserves now at 1.5% and poised to go higher, the payments to banks for sitting on their asses will only grow. This will certainly be the case if the Fed’s balance sheet unwind remains stuck in the mud as it currently seems to be. Sounds like a pretty good racket.

There is a lot at stake for the housing market in 2018, especially with inflated home prices and diminished affordability in general. The Federal Reserve is sputtering out of gate on their normalization promises, and it remains to be seen whether they have the will to follow through with the plan. For now the trend of home price inflation remains intact, and the Fed seems unwilling or unable to prick the everything bubble it has created.