by Nomi Prins, Daily Reckoning:

In the Fed’s July report to Congress, Jerome Powell unleashed what was likely the most important statement to the Trump administration. Powell said that interest rate hikes, which had been forecast to include two more hikes this year, would be executed at a gradual pace ‘for now.’

Those two coded words are very important.

The biggest banks on Wall Street will likely view those two words alone to mean that the Fed is still cautious about the economy and the financial markets. What they know is that the Fed is signaling that it reserves the right to return to its full toolkit of monetary policy options.

The Fed could apply one of three options: to further its gradual quantitative tightening (QT) program, to remain neutral, or to launch another round of quantitative easing.

The Fed bloated its balance sheet from $800 billion to a high of $4.5 trillion since the financial crisis first appeared on its radar screen. That money was allegedly used to bolster financial markets and keep the economy afloat in the economic aftermath of the 2008 crash.

The Fed added $700 billion to its balance sheet from September 2008 to November 2014. Incidentally, that figure was more than the U.S. nominal GDP expanded over the same period.

It’s hard to believe, but this November will mark the 10th anniversary of quantitative easing (QE).

And what do we have to show for it?

As Stephen Roach, former chairman of Morgan Stanley Asia notes:

The verdict on QE is mixed: the first tranche (QE1) was very successful in arresting a wrenching financial crisis in 2009, but the subsequent rounds (QE2 and QE3) were far less effective. The Fed mistakenly believed that what worked during the crisis would work equally well afterwards.

Wall Street made out like bandits, while Main Street mostly got crumbs. The majority of Americans saw very few benefits from QE.

Now that process has swung into reverse — somewhat.

At the end of last year, the Federal Reserve announced it would aim to reduce the size of its massive book of assets by $50 billion per month as part of its efforts to ‘taper’ its quantitative easing program.

But the devil is in the details. As one CNBC article notes, “the Federal Reserve’s efforts to unwind its mammoth portfolio of bonds isn’t as easy as advertised.”

It turns out that the money the Fed gets from the payments coming from the mortgage-backed-securities (MBS) it holds, is “running below the capped level of payments it has targeted for runoff later this year.”

What this means is that that the Fed isn’t hitting the proper levels to meet its own book reduction goals.

Either it couldn’t compute its own book proceeds properly — or it was lying to test the markets for a downside reaction while tapering.

Yes, quantitative tightening is happening — the Fed has actually reduced its books by $100 billion so far this year on top of $67 billion last year — it’s just unfolding slower than promised. At less than $170 billion, that’s still barely a drop in the bucket when you look at its total balance sheet.

This means that more central bank credit, or what I call dark money, will still be available for the markets than the Fed (or the media) had indicated.

Quantitative easing never created strength, it only camouflaged weakness by increasing debt and stock buybacks.

But there’s little to signal that central banks will totally ended their QE programs, even though they have switched to a QT narrative for now. If things get bad too quickly, there could be a flurry of more QE coming in from the Fed and its central bank partners in Europe and Japan.

The real story is that the Fed still fears the next recession.

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