It shed 24% of the Treasury securities it had added during pandemic QE, footprint in ballooning Treasury market shrinks.
By Wolf Richter for WOLF STREET.
The Fed’s Quantitative Tightening (QT) and the liquidity unwind from the bank bailouts in March continued: Total assets dropped by $105 billion in August, and by $864 billion since peak-QE in April 2022, to $8.10 trillion, the lowest since July 2021, according to the Fed’s weekly balance sheet today.
At this pace, the Fed’s total assets will fall below $8 trillion in October.
Since the bank panic in March, the Fed has reduced its assets by $632 billion, as QT continued unperturbed on the same track as before the panic, and as the bank liquidity support measures got unwound.
From crisis to crisis to raging inflation: Note the cute little QT #1 between November 2017 and August 2019, when total assets dropped by $688 billion. QT #2, which started ramping up in the summer of 2022, has already reached $864 billion, but the Fed’s pile has gotten a lot bigger and there’s a lot more to take off the pile.
And now inflation is way above the Fed’s target, while during QT #1, inflation was at or below the Fed’s target:
QT continues relentlessly.
Treasury securities: -$59.5 billion in August, -$783 billion from peak in June 2022, to $4.99 trillion, the lowest since April 2021.
The Fed has shed 24% of the Treasury securities it bought during pandemic QE ($3.27 trillion).
Treasury notes and bonds “roll off” the balance sheet mid-month or at the end of the month when they mature and the Fed gets paid face value for them. The roll-off is capped at $60 billion per month, and about that much has been rolling off, minus the inflation protection the Fed earns on Treasury Inflation Protected Securities (TIPS) which is added to the principal of the TIPS.
The Fed’s weight in the Treasury market dropped as its holdings of Treasury securities dropped to $4.99 trillion while the government’s debt ballooned to $32.9 trillion amid the tsunami of new issuance of Treasury securities to fund its deficit spending. This reduced the Fed’s holdings to 15.2% of total Treasury securities outstanding.
Mortgage-Backed Securities: -$19 billion in August, -$241 billion from the peak, to $2.50 trillion, the lowest since October 2021.
The Fed only holds government-backed “Agency MBS,” where taxpayers carry the credit risk. MBS come off the balance sheet primarily via pass-through principal payments that holders receive when mortgages are paid off (mortgaged homes are sold, mortgages are refinanced) and when mortgage payments are made.
The surge in mortgage rates has caused passthrough principal payments to slow to a trickle as fewer mortgages are getting paid off because home sales have plunged and refis have collapsed. So the MBS run-off has been between $15 billion and $21 billion a month, well below the $35-billion cap.
The bank-panic liquidity measures.
Repos with “foreign official” counterparties: $0, paid off in April. The Swiss National Bank likely used them to fund the dollar-liquidity support for the take-under of Credit Suisse by UBS.
Discount Window: roughly unchanged in August, at $2.0 billion, compared to $153 billion in March (red line in the chart below).
Discount Window lending to banks has been around for a long time. This is not free money, it’s expensive money: since the last rate hike, the Fed charges banks 5.50%. In addition, banks have to post collateral under strict limits and at “fair market value.” So banks pay off these Discount Window loans as soon as they can.
Bank Term Funding Program (BTFP): +$2.2 billion in August, to $108 billion (green line).
A creature of the March bank panic, this facility is less punitive than the Discount Window. Banks can borrow for up to one year, at a fixed rate, pegged to the one-year overnight index swap rate plus 10 basis points. And the collateral can be valued at purchase price rather than at the lower market price.
This $108 billion borrowed by banks from the Fed is tiny compared to the $22.8 trillion in commercial bank assets held by the 4,100 commercial banks in the US.
Loans at the Discount Window in red, loans at the BTFP in green. Clearly, some loans were shifted from the punitive terms of the Discount Window to the less punitive terms of the BTFP.
Loans to FDIC: -$14 billion in August, to $134 billion.
The FDIC has been selling the assets that it took on with the takedowns of Silicon Valley Bank, Signature Bank, and First Republic. It has started selling its MBS holdings to the market at a fairly steady clip. Two days ago, it announced that it would start selling a $33 billion CRE loan portfolio that it took on from Signature Bank. Nearly half of those CRE loans are backed by multifamily rent-stabilized or rent-controlled properties in New York. As the FDIC sends the asset-sales proceeds to the Fed, the loan balance declines.
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