Fed Balance Sheet QT:

Aug 02, 2023

Quantitative Tightening (QT) continues. The Fed’s total assets dropped by $91 billion in July, and by $759 billion since the all-time peak in April 2022, the biggest drop ever, to $8.21 trillion, according to the Fed’s weekly balance sheet today.

Since the height of the bank panic in March, the Fed has shed $527 billion in assets, as QT continued on track and as bank liquidity support measures are unwound.

The chart shows the details of the banking crisis, and how it is being unwound. The next chart down shows the long view:

From crisis to crisis to raging inflation: During the nearly two years of QT #1 between November 2017 and August 2019, total assets dropped by $688 billion, compared to $759 billion in one year of QT #2:

Treasury securities: -$58.5 billion in July, -$723 billion from the peak in June 2022, to $5.05 trillion, the lowest since May 2021.

The Fed has now shed 22.3% of the Treasury securities it bought under its pandemic QE ($3.25 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 declining weight in the Treasury market. The Fed’s holdings of Treasury securities have now declined to 15.6% of the total $32.59-trillion pile in Treasury securities outstanding.

The drop in share occurred because the Fed has been cutting its holdings, while the government is issuing a tsunami of new securities to fund its deficit spending.

Mortgage-Backed Securities: -$21 billion in July, -$223 billion from the peak, to $2.52 trillion, the lowest since October 2021.

The Fed only holds government-backed “Agency MBS,” where taxpayers carry the credit risk, not the Fed.

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 regular mortgage payments are made.

The run-off in MBS has been well below the cap of $35 billion per month because passthrough principal payments have slowed to a trickle, because fewer mortgages are getting paid off, because home sales have dropped and refis have collapsed:

Repos with “foreign official” counterparties: $0, paid off in April. The Swiss National Bank likely used this program to fund the dollar-liquidity support for the take-under of Credit Suisse by UBS.

Discount Window: -$1.5 billion in July, down to $1.9 billion, compared to $153 billion in March. Discount Window lending to banks has been around for a very long time. Since the last rate hike, the Fed charges banks 5.50% to borrow at the Discount Window ( “Primary Credit”). In addition, banks have to post collateral under strict rules and at “fair market value.” This is expensive money for banks; they would normally be able to borrow for less from depositors without having to post collateral. So banks pay off these Discount Window loans as soon as they can.

Bank Term Funding Program (BTFP): +$3.7 billion in July, to $106 billion. This bank lending facility, set up during the bank panic, is similar to the Discount Window but less expensive, more flexible, and with easier collateral rules for the banks.

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 at the time of the loan. Banks have to post collateral, but it can be valued at purchase price rather than current market price. This is still expensive money for banks, but less expensive than at the Discount Window. So banks paid off the Discount Window loans and borrowed from BTFP.

The chart shows loans at the Discount Window in red, and the loans at the BTFP in green:

Loans to FDIC: -$17 billion in July, to $148 billion. The FDIC has been selling the loans and securities it took over from the collapsed Silicon Valley Bank and Signature Bank. As the FDIC returns those funds to the Fed, the loan balance declines.

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