Fed Balance Sheet QT: -$1.60 Trillion from Peak, to $7.36 Trillion, Lowest since December 2020

Quantitative tightening removed 38% of Treasury securities and 27% of MBS added by pandemic QE.

By Wolf Richter for WOLF STREET.

Total assets on the Fed’s balance sheet fell by $77 billion in April, to $7.36 trillion, the lowest since December 2020, according to the Fed’s weekly balance sheet released today. Since QE ended in April 2022, the Fed has lost $1.6 trillion.

After months of discussion, the Fed officially clarified when, how and by how much it would slow QT. They’re trying to reduce the toll as much as possible without blowing anything up, and it’s easy to do, that’s the hope.

• Starts in June
• Treasury runoff cap reduced to $25 billion from $60 billion
• MBS withdrawal cap remains unchanged at $35 billion
• If MBS runs out faster than $35 billion per month, then the excess will be replaced by Treasury securities, not MBS.
• MBS will essentially disappear from the balance sheet in the “longer term”.

QT by category.

Treasury securities: -$57 billion in April, -$1.25 trillion since June 2022 peak, to $4.52 trillion, lowest since October 2020.

The Fed has now dumped 38% of the $3.27 trillion in Treasury securities it added during pandemic QE.

Treasury bills (2-10 year securities) and Treasury bonds (20- and 30-year securities) “disappear” from the balance sheet mid-month and at the end of the month when they mature and the Fed is paid at its nominal value. . The reduction is capped at $60 billion per month, and that’s roughly that amount that has fallen, minus the inflation protection the Fed gains on Treasury Inflation-Protected Securities (TIPS) which is added to the principal of TIPS.

Goods of treasure. Unchanged in April at $195 billion. These securities with durations of up to 1 year are included in the $4.52 trillion in Treasury securities on the Fed’s balance sheet. But they play a special role in QT.

The Fed lets them roll (and doesn’t replace them as they mature) only if long-term Treasury securities don’t mature enough to reach the $60 billion monthly cap. This allowed the Fed to dump about $60 billion in Treasury securities each month.

From March 2020 until the rise of QT, the Fed held $326 billion in Treasuries that it constantly replaced as they matured (flat line in chart below).

Slower QT from June will follow the same principle with Treasury bills. But the first month with Treasury shrinkage below the new $25 billion cap is September 2025 ($17 billion). Treasury bills will therefore remain unchanged on the balance sheet at $195 billion until then, even if notes and bonds come off:

Mortgage-backed securities (MBS): -$16 billion in April, -$368 billion since peak, to $2.37 trillion, lowest since July 2021. The Fed lost 27% of the MBS it added during pandemic QE.

MBS come off the balance sheet primarily through the pass-through principal payments that holders receive when mortgages are repaid (mortgaged homes are sold, mortgages are refinanced) and when mortgage payments are made.

But existing home sales plunged and mortgage refinancing collapsed, resulting in fewer mortgages being paid off, and principal payments transferred to MBS holders, like the Fed, being reduced. to a trickle, and the MBS are losing their balance. leaf at a rate well below the $35 billion cap.

Under the slower QT as of June, the MBS cap remains at $35 billion. As the housing market unlocks and sales volume increases to more normal levels, mortgage payments will increase, and therefore principal payments passed on to MBS holders will increase, and the roll-off of MBS will increase from current levels. current, and the curve in the graph below will steepen.

If passed-through principal payments exceed $35 billion — during the pandemic housing boom, they exceeded $110 billion in several months — the excess will be replaced by Treasury securities, not MBS, as the Fed wants gradually remove MBS from its balance sheet.

Bank liquidity facilities.

Discount window: +1.3 billion dollars in April, to 6.8 billion dollars. During the banking panic of March 2023, loans briefly reached $153 billion.

The discount window is the Fed’s classic offer of liquidity to banks. The Fed currently charges banks 5.5% interest on these loans – one of its five key rates – and requires market value collateral, which is costly for banks. They won’t use this facility unless they need it, even though the Fed has urged them to use it more regularly.

Bank Term Financing Program (BTFP): -$6.4 billion in April, to $124 billion.

Created during a panic weekend in March 2023 after the bankruptcy of the SVB, the BTFP had a fatal flaw: its rate was based on the market rate. When the rate-cutting spree began in November 2023, market rates plunged even as the Fed held its key rates steady, including the 5.4% it pays banks on reserves. Some smaller banks then used BTFP to make arbitrage profits, borrowing from BTFP at a lower market rate and then leaving the cash in their reserve account at the Fed to earn 5.4%. This arbitrage caused BTFP balances to rise to $168 billion.

Frustrated that the BTFP was being abused for profit, the Fed ended the arbitrage opportunity in January by changing the rate. He also let the BTFP expire on March 11. Loans taken out before March 11 can still be deferred for one year. As of March 11, 2025, the BTFP will be zero.

The results after 12 months of slower QT.

In May, the Fed will lose about $75 billion more in assets, bringing its balance sheet to about $7.28 trillion. In June, the slower QT sets in. After the first 12 months of slower QT, so by the end of May 2025, total assets could be lower by the following amounts:

• If MBS pass-through principal payments continue at $15 billion per month, instead of accelerating, they would remove $180 billion by the end of May 2025.
• The Treasury’s $25 billion cut would eliminate $300 billion by the end of May 2025.
• The BTFP will fall to zero by March 2025, bringing in $124 billion.
• Unamortized premiums bring in $2.2 billion per month, or $26 billion in 12 months.
• Total: minus $630 billion by the end of May 2025.

Thus, without accelerating the reduction of MBS, the balance sheet would have fallen to around $6.63 trillion by the end of May 2025.

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