Combined QT by the Fed and ECB removed $4.4 trillion in liquidity so far. A couple of years ago, this would have been an unimaginable feat.
By Wolf Richter for WOLF STREET.
Under its Quantitative Tightening program, the European Central Bank has reduced its total assets by €2.39 trillion as of the weekly balance sheet released today.
The ECB’s total assets, now at €6.45 trillion, are down by 27% from the peak of €8.84 trillion, and are at the lowest level since August 2020. The ECB has shed 58% of the amount in assets that it had piled on during the pandemic.
Compared to the Fed’s QT, and in USD at the current exchange rate, the ECB has shed $2.66 trillion in assets, while the Fed has shed $1.78 trillion. Combined, the Fed and the ECB have removed $4.44 trillion in QE liquidity since starting QT, which would have been ridiculously unimaginable before 2022, when QE forever had still been baked into the cake. But the sudden resurgence of inflation has forced their hands.
Loans and bonds.
Back in the day of QE, the ECB performed QE with two types of assets, loans and bonds.
The heavy lifting so far under the QT program was done by shedding its QE loans, which are down by 96%, or by €2.1 trillion, from the peak. With a remaining balance of just €87 billion, they are at the lowest level since 2005 (blue in the chart below).
The roll-off of its QT bonds was phased in, starting in March 2023, and was then accelerated. So far, the bond holdings have declined by 11%, or by €524 billion, from the peak. The roll-off accelerated further in July (red line).
Loan QT: -€2.11 trillion (-96%) from peak, to €87 billion. The ECB has always handled QE via waves of loans: during the Financial Crisis, the Euro Debt Crisis, the period of no-crisis, and the pandemic. The ECB called these loan programs Longer-Term Refinancing Operations (LTRO), then Targeted Longer-Term Refinancing Operations (TLTRO) with serial numbers. During the pandemic, the ECB called that generation of loans TLTRO III.
Total loans had peaked at €2.2 trillion, of which the pandemic generation of TLTRO III loans amounted to €1.6 trillion, with the remainder being composed of the still outstanding loans from prior programs. And they’re essentially now gone.
Bond QT: -€524 billion (-11%) from peak, to €4.44 trillion. The roll-off of its QT bonds was phased in starting in March 2023, and was then accelerated.
During QE, the ECB had purchased government bonds, corporate bonds, covered bonds, and asset-backed securities under two programs:
- APP (“asset purchase programme” since 2014)
- PEPP (“pandemic emergency purchase programme” since March 2020).
The bond roll-off takes place when bonds mature, and the ECB gets paid face value for them, but then doesn’t replace the maturing bonds by reinvesting the funds.
Initially, starting in March 2023, only APP bonds were allowed to roll off. But in July 2024, PEPP bonds started rolling off also (€7.5 billion matured without replacement), as part of the acceleration of QT.
Over the past four months, bonds have been rolling off at an average pace of about €37 billion ($41 billion) per month.
Bond QT is designed to run for years without fanfare on automatic pilot in the back ground, smoothly removing liquidity in a predictable manner, so liquidity has time to flow to where it’s needed from where it’s in excess, attracted by the higher yields that those who need liquidity are willing to pay. And so far, so good; nothing has blown up yet.
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I fear QE will never be retired by The gov and central banks. Its a scary policy but the power is hard for
Governments to
Give up
The FED has already described a possible QE 2.0. The idea was to shift duration, from short to long, without the massive expansion of their balance sheet. Nice idea, but no detail on how they would transition back from long to short in a reasonable amount of time.
Perhaps the ECB has similar plans.
I think the FED can say a lot of things but I always think of them as the perfect embodiment of the famous quote by Mike Tyson
““Everybody has a plan until they get punched in the face then, like a rat, they stop in fear and freeze”
Instead of a freeze if the wheel starting to come off hard in the next downturn, I would put good money they will likely revert back to what they have done before, large and quick and this plan goes out the window…
I believe your fears are justified. If the markets believed QE was no longer a tool, wouldn’t asset prices would drop 50% tomorrow?
The Fed cornered itself. By allowing asset prices to reach such ridiculous heights, it now has to support asset prices or a major recession will ensure. The Feds policies monetary policies of the past 20 years lacked a sensible exit plan from stimulus.
But time will tell if the Fed has come to its senses. Reducing interest rates before an asset price correction is not a good idea. The Fed has been under appreciating the damaging impact of insane asset prices for a long time.
Most yields under 5% now! WTH! Another wave of inflation? House prices higher with a quarter point cut?gotta a one month at 5.10%. Thanks Wolf
This was about the ECB, not the Fed. So do read the article.
In Germany, the 10-year yield topped out at 3% and the 3-month yield topped out at about 3.9%. They never got anywhere near 5%.
Not even the Italian 10-year yield got to 5%, but fizzled after it got to about 4.95%. And the Italian 3-month yield topped at about 3.95%.
In terms of house prices in Europe, we’ve got that covered:
https://wolfstreet.com/2024/07/06/the-most-splendid-housing-bubbles-in-europe-biggest-price-drops-in-germany-finland-sweden-austria-france-denmark/
Also:
“gotta a one month at 5.10%.”
That seems low. The one-month yield traded at 5.48% today, same as a week ago. Last week, the 4-week T-bills sold at auction at an investment yield of 5.35%.
Yes. Especially if the rumors of capital flight out of China are true.
My two cents anyway. With central banks and governments around the world playing the same games I don’t see how we avoid a global inflationary depression.
I am still waiting for the Fed to get their balance sheet below 7 trillion. I still don’t think it will happen, despite Wolf’s analysis that they could go as low as 6.6 trillion, I think it was. The bottom line is that the Fed has enabled the greatest theft of balance sheet wealth from the low and middle class to the upper 1% in the history of the planet.
Go ahead Jerome, sell ALL those MBS too! I triple dog dare you! The Fed NEVER should have touched MBS, and all those financialization firms should have gone bankrupt and had their “assets” sold. I appreciate the analysis, but it doesn’t change the fact that it’s really forensic analysis of a crime scene…
Amen Brother
Europe does not have a dozen of trillion or multi trillion dollar companies, but what Europe does have is financial reasonably.
Admittedly we will have or maybe Already have a recession, but that’s good. It cleans out the waste and rearranges jobs.and who k ows, with a 2 trillion debt deficit, maybe Europe would also manage to grow. Lol.
“I am still waiting for the Fed to get their balance sheet below 7 trillion.”
As we’ve been saying for a while: Late this year or early next year, no later than March, right on track.
Also, the MBS roll-off has started to accelerate with accelerating mortgage refi applications (they have surged from very low levels). There is a long lag between a refi application and when the Fed gets the passthrough principal payments when the mortgage is actually refinanced. But we’re seeing the first signs of it.
Very interesting. I do wonder what the peak MBS rolloff pace will look like. When a recession happens and people must sell there could be a real rush out the door. A lot of houses bought in 2010-2020 changing hands.
Again, the Fed NEVER should have meddled around with MBS and people/corporations holding that shit should have choked on it.
Easy-Peasey. Eight months of $25 billion in “normal” QT almost gets the Fed to $7 trillion on the Balance Sheet all by its lonesome (without the MBS roll-offs). But don’t forget the BTFP loans will have to be repaid to the Fed by March as well. From your last article on the Fed’s QT progress so far.
“So over the next 8 months, the BTFP will remove another $106 billion from the balance sheet, on top of regular QT.”
https://wolfstreet.com/2024/07/05/fed-balance-sheet-qt-34-billion-in-june-1-74-trillion-from-peak-to-7-22-trillion-lowest-since-november-2020/
Wolf, looking at your first chart (ECB Total Assets), where do you see the “floor” for the ECB, considering cash in circulation, etc.?
I have no idea.
The propaganda machine is on overdrive:
“The dollar is weakening, so buy crypto, houses, and stocks. Stocks, crypto, and houses are *cheap* right now, especially anything touching AI. A great buying opportunity before the 2025/2026 surge!”
“The economy is great!”
“Inflation is moderating!”
“WW3 is starting…oops, scratch that – WW3 is cancelled. Recession is coming…lol jk no recession. Crash…no crash but instead a huge rally to ATH in everything. We can’t decide what is happening from one day to the next, but our advanced AI bots will update headlines every 5 minutes to accommodate. One thing for sure beyond a shadow of a doubt in which there is 100% consensus: (economists predict) the Fed will *absolutely* drop rates by 25-50 basis points in September!”
The charade is nauseating.
You don’t need to feel depress about this.
Just look at what happened in last 20 years and act accordingly.
It is a lesson for everyone.
In last few decades, USD has continuously lost purchasing power and precipitously so in last 4 years.
Things have not become more valuable or expensive, but USD has lost value over time.
The only game in the town for highly indebted govt is to inflate away the debt.
I look at it more like accounting. Govt debt is an asset for someone else (asset = liabilities). Equity markets and bond markets in the US are roughly equivalent in total value and get rebalanced in many funds automatically to remain a certain ratio. So when Govt debt goes up, assets go up. And compound interest is a double edged sword…great for those that have the interest accruing asset and terrible for those that owe the money. Looking at govt debt over the last 40 years it’s exponential as I would expect compounding to do in the long run even at a low rate…just needs time. I see nothing but continued and even faster loss of purchasing power of the dollar just by that accounting.
Z33,
Spot on! It’s just MATH… …and it is global, not just the U.S.
Current fed balance sheet: $7.177t, and dropping every week.
Actually, the balance sheet was flat last week, not dropping, and as you point out, still not below 7 trillion.
The roll-offs occur on the 15th, which are reflected on the weekly balance sheet tomorrow, and on the last day of the month, which are reflected on the first weekly balance sheet of the new month. Everyone of my balance sheet articles points this out. And if you ever read a single one of them, you should know that.
Bloggers who say that look, the Fed stopped QT because nothing came off the balance sheet during an in-between week are card-carrying idiots. Don’t read their ignorant BS. And if you do, don’t drag their ignorant BS into here, because it reflects on you.
Wolf – what is this noise about downward revision in jobs data anticipated tomorrow?
Thanks!
We’ll find out tomorrow, won’t we?
Will be interesting….let’s see if WS will once again be in the good news is good news and bad news is great news mood, since their magical Sept window is right around the corner…IF there’s a revision tomorrow, you can bet the shills will be out in full force demanding a large rate cut in Sept.
Another rinse and repeat cycle and then we grind (or rocket) higher
But good news is good news, and bad news is good news because it means QE2 is right around the corner, so buy buy buy!
What could possibly go wrong with this approach?
First time ever the majority win in markets (at whose cost? QE1 ‘everyone’ paid)
Are people dumb enough to accept QE2 again without instant inflation effects?
Thus a 3rd option is required. The law of unintended consequences.
CBs step in, but it’s not enough, and stuff still crashes hard. FOMO BTFD wasn’t a good idea.
MW: Payroll-data revision could rattle bond market ahead of Powell’s Jackson Hole speech
I know this is about the EU not the US but it looks like our Fed are laggards when it comes to QT. We are a bigger economy by 25% yet our QT is lower by 25%. Fed wimpishness? Oh, I forgot: something might break.
What ever happened to free market capitalism? With central banks involved, you have nothing more than a planned economy.
The Fed is not Gosplan. Not even close.
Nor is the ECB.
Wolf, Thanks for this good news article
The QT line looks like the scenic route to your mother in law’s house.
Monetary policy – an instrument for taxation! The noble elites knew centuries ago that you can only tax so far through the fiscal policy lever, before running the risk of losing your head.
The insidious inflation tax, implemented through elastic fiat currency regimes (USD & Euro), offers the lords of easy money another avenue to tax and to prevent private capital formation by the proletariat classes, thereby ensuring they serve in perpetuity their masters!
Correct. However, it’s been a global economy for a while now, and while having localized bouts of hyperinflation can be tolerated and dealt with (talent and capital go elsewhere), how’s that going to work on a global scale? I guess we are about to find out…
I’ll put that on a T-Shirt for you.
We’ll make millions and awaken many snoozers in the process.
> A couple of years ago, this would have been an unimaginable feat.
Says a lot about how crazy we got a couple of years ago. Will we see negative rates and these amount of QE again this century?
A 2 trillion deficits is still crazy.