Quantitative Tightening has shed 25.2% of total assets. The Assets-to-GDP ratio declined to 22.4%, first seen in 2013.

By Wolf Richter for WOLF STREET.

Total assets on the Fed’s balance sheet declined by $14 billion in April, to $6.71 trillion, the lowest since April 2020, according to the Fed’s weekly balance sheet today.

Since peak balance sheet at end of QE in April 2022, the Fed’s QT has shed $2.26 trillion, or 25.2% of its total assets, and it has shed 46.9% of $4.81 trillion in pandemic QE it had piled on from March 2020 through April 2022.

April was the first month of the slower-paced QT announced formally at the last FOMC meeting, under which the Treasury runoff has been reduced from $25 billion a month to $5 billion a month. The pace of QT of Mortgage-Backed Securities was not reduced or capped; it’s a function of principal payments that borrowers make that are passed through to MBS holders. Whatever those pass-through principal payments are, that’s what comes off the balance sheet.

QT assets.

Treasury securities: -$3.2 billion in March, -$1.56 trillion from peak in June 2022 (-27.0%), to $4.22 trillion, the lowest since July 1, 2020.

In terms of the $3.27 trillion in Treasury securities piled on during pandemic QE, the Fed has shed now 47.6% of them.

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. As of this month, the roll-off has been capped at $5 billion per month.

Given the huge Treasury holdings of $3.27 trillion and the large amounts of securities that mature every month and that now have to be replaced, there are some squiggles, there always have been squiggles, but now they show up more because $5 billion in QT is a lot smaller than $25 billion or $60 billion, which had been the original Treasury QT amount.

Mortgage-Backed Securities (MBS): -$16.1 billion in April, -$567 billion from the peak, to $2.17 trillion, where they’d first been in February 2021.

The Fed has shed 21% of its MBS since the peak in April 2022. In terms of the $1.37 trillion in MBS that the Fed added during pandemic QE, it has shed 41% of them.

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 as sales of existing homes have plunged and mortgage refinancing has collapsed, far fewer mortgages got paid off, and passthrough principal payments to MBS holders, such as the Fed, have become a trickle. As a result, MBS have come off the Fed’s balance sheet at a pace that has been mostly in the range of $14-17 billion a month.

The Fed holds only “agency” MBS that are guaranteed by the government, where the taxpayer would eat the losses when borrowers default on mortgages, not the Fed.

Bank liquidity facilities: inactive.

The Fed has three bank liquidity facilities, after it shut down the two (BTFP and Loans to the FDIC) that it had invented during the March 2023 bank panic.

And these remaining three are essentially inactive. The Fed has been exhorting banks to start practicing using these facilities with “small value exercises,” or at least get set up to use them, and pre-position collateral at the Discount Window so that they could use it quickly, etc..

• Central Bank Liquidity Swaps ($62 million)
• Repos ($111 million)
• Discount Window: $3.5 billion, up by $1.3 billion from a month ago. During the SVB panic, it had spiked to $153 billion.

What else was part of the $14 billion in QT?

The balance sheet declined in total by $14 billion in April. But Treasury securities declined by $3.2 billion and MBS by $16.0 billion, for a combined decline of $19.2 billion.

Discount Window borrowing increased by $1.3 billion, as noted above, which increased the balance sheet by $1.3 billion and thereby reduced the QT amount to $17.9 billion (from $19.2 billion).

“Other assets” increased by $5 billion, which reduced the QT amount to $12.9 billion (from $17.9 billion).

This $5 billion consisted mostly of accrued interest from its bond holdings that the Fed set up as a receivable (an asset) in April. When it receives that interest payment in May, the Fed destroys that money and it comes off the balance sheet, and the account declines by that amount (the Fed doesn’t have a “cash” account, like companies do; it creates money when it pays for something and destroys money when it gets paid).

Since this account also includes “bank premises” and other accounts receivables, it will always have a balance.

“Unamortized premiums” declined by $1.8 billion, which increased the QT amount to $14.7 billion (from $12.9 billion). And that $14.7 billion is about by how much total assets declined.

The unamortized premiums are a regular accounting entry with which the Fed writes off the premium over face value it had to pay for bonds during QE that had been issued months or years earlier with higher coupon interest rates and that had gained value as yields dropped before the Fed bought them. Like all institutional bondholders, the Fed amortizes that premium over the life of the bond. The remaining balance of unamortized premiums is now down to $241 billion, from $356 billion at the peak in November 2021:

The assets-to-GDP ratio. Before QE started in 2009, the Fed’s balance sheet grew over the years roughly in line with the economy as measured by “current dollar” GDP (with neither the balance sheet nor GDP adjusted for inflation). This assets-to-GDP ratio was 6.0% in 2008 before all the QE craziness started.

At the end of QE Infinity in December 2014, the assets-to-GDP ratio hit 25%. It then declined as GDP grew while the balance sheet was at first flat and then declined during QT-1.

During pandemic QE, the assets-to-GDP ratio spiked to 35.5% in Q2 2020 as GDP collapsed while the Fed’s balance sheet exploded. As GDP bounced back, the ratio dropped for one quarter, but then QE continued even faster than GDP rose, and the ratio returned to 35.4% in Q1 2022, when QE stopped.

After $2.24 trillion in QT and three years of economic growth since Q1 2022, the ratio has now dropped to 22.4%, just above where it had first been in Q3 2013:

QE has produced years of hangover for the Fed. In case you missed it: Fed’s Operating Losses Declined to $78 Billion in 2024, “Unrealized Losses” Rose to $1.06 Trillion

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