Quantitative Tightening has shed 41% of the assets that the Fed had added during pandemic QE.
By Wolf Richter for WOLF STREET.
Another milestone in the Fed’s QT program: Total assets on the Fed’s balance sheet dropped to $6.99 trillion, according to the Fed’s weekly balance sheet today. The balance sheet first reached this level in May, 2020, after nearly three months of mega QE (blue arrow in the chart).
In October, total assets fell by $53 billion. Since the end of QE in April 2022, total assets have declined by $1.97 trillion, removing 41% of the assets the Fed had added during pandemic QE.
QT assets by category.
Treasury securities: -$24 billion in October, -$1.43 trillion from peak in June 2022, to $4.34 trillion, the lowest since August 2020.
The Fed has now shed 44% of the $3.27 trillion in Treasury securities that it had added during pandemic QE.
Treasury notes (2- to 10-year) and Treasury bonds (20- & 30-year) “roll off” the balance sheet mid-month and at the end of the month when they mature and the Fed gets paid face value. The roll-off is now capped at $25 billion per month. About that much rolled off in September, minus the amount of inflation protection the Fed earns on its Treasury Inflation Protected Securities (TIPS) that was added to the principal of the TIPS.
Mortgage-Backed Securities (MBS): -$16 billion in October, -$474 billion from the peak, to $2.27 trillion, the lowest since June 2021. The Fed has shed 35% of the MBS it had added during pandemic QE.
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. But sales of existing homes have plunged, as has mortgage refinancing. So fewer mortgages got paid off, and passthrough principal payments to MBS holders, such as the Fed, have been reduced to a trickle. As a result, MBS have come off the balance sheet at a pace that has been below $20 billion in most months.
There has been some discussion recently at the Fed, including in October by Dallas Fed President Lorie Logan, about outright selling MBS to speed up the process of getting rid of them.
The Fed only holds “agency” MBS that are guaranteed by the government, and is therefore not exposed to credit risk if borrowers default on mortgages.
Bank liquidity facilities.
Only two bank liquidity facilities currently show a balance that’s above zero or near-zero: The Discount Window and the Bank Term Funding Program (BTFP). The other bank liquidity facilities are either at zero or near zero:
- Central Bank Liquidity Swaps ($151 million)
- Repos ($101 million)
- Loans to the FDIC ($0).
Discount Window: roughly unchanged in October, at $1.6 billion. During the bank panic in March 2023, loans had spiked to $153 billion.
The Discount Window is the Fed’s classic liquidity supply to banks. As of today’s rate cut, the Fed charges banks 4.75% in interest on these loans and demands collateral at market value, which is expensive money for banks. In addition to the cost, there’s a stigma attached to borrowing at the Discount Window.
And it’s “clunky” to use, according to Powell, who has exhorted banks to use this facility to manage their liquidity needs, and to practice using it with small-value exercise transactions, and pre-position collateral so that they can use it when they need to.
Bank Term Funding Program (BTFP): -$15 billion in October, to $56 billion, the lowest since its second week of existence in March 2023.
The BTFP had a fatal flaw when it was cobbled together over a panicky weekend in March 2023 after SVB had failed: Its rate was based on a market rate. When Rate-Cut Mania kicked off in November 2023, market rates plunged even as the Fed held its policy rates steady, including the 5.4% it paid banks on reserves. Some banks then used the BTFP for arbitrage profits, borrowing at the BTFP at a lower market rate and leaving the cash in their reserve account at the Fed to earn 5.4%. This arbitrage caused the BTFP balances to spike to $168 billion.
The Fed shut down the arbitrage in January by changing the rate. It also decided to let the BTFP expire on March 11, 2024. Loans that were taken out before that date can still be carried for a year from when they were taken out. So, no later than March 11, 2025, the BTFP will be zero, removing another $56 billion from the Fed’s balance sheet by then.
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Wolf
Your points have meaning as compared to pandemic levels and i so greatly appreciate your info and point of view.
But, the tone seems really empathetic to the feds overliquified monetary stance. Anything but un-telegraphed affirmative large sales of MBS & Treasuries into the market until zero sooner, next 12 mos, should have been occurring since 2019, is just not acceptable from a responsible monetary stance.
As we know the Fed needs to dramatically reduce as the next bailout is around the corner. It’s always the ones you love the most who cut deepest bud. Always, graciously in your debt sir.
Nonsense. You just want to blow up everything.
Liquidity doesn’t flow where it needs to go instantly. And if the Fed withdraws liquidity too fast, it will suck it up through two pipelines (Treasury and MBS) but the feeder pipelines won’t be big enough and the system collapses.
QE was bad. But there is no reason to purposefully blow everything up afterwards.
I get really tired of this dumb stuff, been hearing it for two years.
Remind me to break out the Hunter S. Thompson.
This is prime time for gonzo man.
Large sales of MBSs will drive mortgage rates higher. The Fed has a tiger by the tail as far as mortgage backed securities are concerned. Surely there is a model that shows how high the rates would go and for how long. The public is getting frustrated with unaffordability of housing. Normally over the past 40 years home prices would have declined with elevated mortgage rates but not this time.
But they could do… small MBS sales. Feel out the market reaction.
The Fed wants this stuff off their bal sht but it’s going soooo slowwww because of the frozen housing market.
Has the monthly MBS cap ever been hit since the Fed started QT?
It is great to see the balance sheet continuing to be reduced. One aspect I am still struggling to understand (apologies if it has been covered and I’ve missed it) is the mix of bills, notes, bonds purchased, whether during QE or repurchased for amounts over the $25B cap now.
I understand bills are not currently rolling off, and notes and bonds rolling off above the cap are being replaced by other notes and bonds. If during QE the Fed purchased a 7 year note with 3 years remaining would the Fed go out and repurchase another 7 year (or 3 year?) note if over the cap? Or is it some sort of representative sampling of the bond/note market that determines the mix?
7 year.
And that’s somewhat of a problem. And Dallas Fed President Lorrie Logan addressed that here two weeks ago and how to change that, by replacing maturing longer-term notes and bonds with T-bills:
https://wolfstreet.com/2024/10/22/feds-qt-balance-sheet-composition-and-ample-liquidity-dallas-feds-lorie-logan-outlines-the-future-of-the-balance-sheet/
I look forward to when they make that switch to T-bills. If I understand the repurchase strategy correctly, the Fed could have purchased a 30-year bond with 3 years remaining and if it happens to roll off at the end of the month the Fed would replace it with a shiny new 30-year bond, increasing the balance sheet duration significantly.
Thanks Wolf for keeping us updated on Monthly basis.
Balance sheet dropping below 7T is psychological milestone too.
Many people had doubts on whether FED had resolve to do QT and will they do it without blowing off something.
Also in today’s Presser, Powell confirmed he wont Quit if even he is asked to resign. He can’t be fired too (as per him). So till May 2026, we can say QT can continue if FOMC REALLY wants to. Whether they will do it or not is different question.
Agency MBS are created by government or quasi-government agencies. So, although the Fed is not “on the hook” some other government agency is. I am not sure if that makes much difference in the scheme of large government economics.
What’s the difference between loaning money to Fannie Mae or the US Treasury in terms of credit risk?
Almost zero.
The Fed can be criticized for its actions, but it’s hard to argue that it’s behaved with rank stupidity in all cases. It’s a hard task they’ve been given — a difficult balancing act — and they deserve at least a B- rating for their psuedo-wisdom.
“Powell, who has exhorted banks to use this facility to manage their liquidity needs, and to practice using it with small-value exercise transactions, and pre-position collateral so that they can use it when they need to.”
Any word on if/when the Fed will impose runnable ratio requirements on banks? This would encourage them to preposition a lot more Treasuries in order to stay under the ratio.