Compared to the size of the economy, the Fed’s assets are now down to 21.8% of GDP, where they’d first been in 2013.
By Wolf Richter for WOLF STREET.
Total assets on the Fed’s balance sheet dropped by $39 billion in August, to $6.60 trillion, the lowest since April 2020, according to the Fed’s weekly balance sheet today.
Since peak-balance sheet in April 2022, the Fed’s QT has shed $2.36 trillion, or 26.4% of its total assets.
In terms of the Pandemic-era QE, the Fed has shed 49.2% of the $4.81 trillion in assets it had piled on from March 2020 through April 2022.
QT assets.
Treasury securities: -$3.7 billion in August, -$1.57 trillion from peak in June 2022 (-27.2%), to $4.20 trillion, the lowest since June 2020.
During pandemic QE, the Fed had piled on $3.27 trillion in Treasury securities. It has now shed 48.1% of that.
The $3.7 billion decline was in line with the reduced pace of QT for Treasuries of $5 billion a month. The difference was the inflation protection the Fed earned on its holdings of Treasury Inflation Protected Securities (TIPS), which is added to the principal of the TIPS, instead of being paid in cash.
Mortgage-Backed Securities (MBS): -$17.8 billion in August, -$637 billion from the peak, to $2.10 trillion, where they’d first been in February 2021.
The Fed has shed 23% of its MBS since the peak in April 2022, and 46% of the $1.37 trillion in MBS that it had added during pandemic QE.
The Fed holds only “agency” MBS that are guaranteed by the government (issued by Fannie Mae, Freddie Mac, Ginnie Mae), where the taxpayer would eat the losses when borrowers default on mortgages.
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 as mortgage payments are made. But sales of existing homes have plunged and mortgage refinancing has collapsed, and far fewer mortgages got paid off, and passthrough principal payments to MBS holders have slowed to a trickle.
This plunge in sales of existing homes and in mortgage payoffs just finished its third year.
As a result, ever since QT started, MBS have come off the Fed’s balance sheet at a pace that has been mostly in the range of $15-19 billion a month.
The MBS runoff is not capped, whatever comes off comes off and goodbye. But that’s all that the mortgage market has delivered over the past three years.
If pass-through principal payments become a torrent again during a refi boom, the MBS balance drops by the entire amount of the pass-through principal payments, but any amount above $35 billion a month would be replaced with Treasury securities, according to Fed’s revised formula. In that case, QT from MBS and Treasuries combined would reach $40 billion a month under the current QT regime.
Bank liquidity facilities:
There was little activity in August. The Fed has been pushing banks to practice using these facilities with “small value exercises,” or at least get set up to use them and pre-position collateral – which apparently quite a few banks have not yet done – so that they could use them quickly.
- Central Bank Liquidity Swaps ($0.0 billion)
- Standing Repo Facility, or SRF ($0.0 billion).
- Discount Window: $4.4 billion, down by $482 million from a month ago. During the SVB panic, the balance had spiked to $153 billion.
Fed’s balance sheet compared to the size of the economy. The Fed-assets-to-GDP ratio fell to 21.8%, the lowest since Q4 2019, and back where it had first been in Q3 2013 (total assets divided by “current dollar” Q2 GDP).
What else contributed to the $39 billion decline in assets?
The balance sheet declined in total by $39 billion in August. But Treasury securities declined by only $3.7 billion, MBS by $17.8 billion, and the Discount Window by $0.5 billion, for a combined decline of $22 billion.
Another $17 billion of the $39 billion decline came from declines in these three accounts:
Leftover pandemic loan programs declined by $221 million. The two remaining accounts are the PPP liquidity facility and the MSLP, that continue to wind down gradually. Combined, their remaining balance is down to $5.7 billion.
“Other assets” fell by $14.6 billion. This consisted mostly of accrued interest from bond holdings that the Fed had set up as a receivable (an asset) previously, and that it was paid in August. When the Fed receives interest payments, it 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).
This account also includes “bank premises,” which have been in the new recently, and other accounts receivables and will always have some balance.
“Unamortized premiums” fell by $1.9 billion. These are regular accounting entries with which the Fed writes off the premium over face value it had to pay for bonds during QE that had been issued 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 down to $232 billion, from $356 billion at the peak in November 2021:
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how:
Wolf – very helpful. Particularly this at the end:
“Other assets” fell by $14.6 billion. This consisted mostly of accrued interest from bond holdings that the Fed had set up as a receivable (an asset) previously, and that it was paid in August. When the Fed receives interest payments, it 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).”
I have always wondered what happened to the money the Fed receives on interest payments and repayment of principle on its government securities portfolio. “Poof“ it just disappears. This makes sense, but it’s difficult for we normal folks to understand.
Thank you