Federal Reserve Technical Balance Sheet Developments

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Balance sheet resize principles… Alongside its policy statement, the FOMC also published a document entitled “Federal Reserve Balance Sheet Resize Principles”. The committee continues to see “changes in the federal funds rate target range as the primary means of adjusting the monetary policy stance” and “aims to reduce the Fed’s securities in a predictable way over time.” Powell also stated at the press conference that discussions on how and when to downsize its balance sheet have just begun.

 Starting point… While some market analysis highlights June and some September as a balance sheet reduction, the Fed may announce the first round of QT at a low pace in June and make second-round adjustments in September. I will now make a reference to our January 19 Macro Perspective report;

 The Treasury’s debt securities, which will mature in the coming months, cover an area of ​​approximately $1.1 trillion (77 billion in 15 days, 329.7 billion in 3 months, 728 billion in 1 year). When the Fed does not change these bonds (it buys bonds from the market and makes repos and deposits), it will have drawn this amount of liquidity. Treasury bills, which will be redeemed in 1 to 5 years, cover an area of ​​$2.2 trillion. This means that the Fed’s balance sheet will decrease by $3.3 trillion in 5 years from Treasury bills alone.

Here, of course, it is necessary to calculate that MBSs will also participate in QT. Then the size of the shrinkage will increase.

Maturity Breakdown of Securities, Loans and Other Selected Assets and Liabilities, January 2022… Source: Federal Reserve, FRED

 The development of the balance sheet… The size of the Fed’s balance sheet rose from approximately $7.4 trillion at the end of 2020 to approximately $8.5 trillion as of September 2021. In the first three quarters of 2021, as the U.S. economy made progress in recovering from the effects of the COVID-19 pandemic, the Fed evaluated and adjusted as needed various policy tools. The Fed continued to increase its Treasury and mortgage-backed securities (MBS) as part of its monetary policy actions to promote smooth market functioning and harmonious financial conditions, thereby supporting the flow of credit to households and businesses.

Most of the Fed’s other assets declined in the first three quarters of 2021. Most of the funding, credit and liquidity facilities that supported the US economy during the hardest part of the epidemic were closed between the end of 2020 and the end of 2019. Many of these facilities have seen declines in outstanding balances as their underlying assets are due, prepaid or sold in the first nine months of 2021.

Total assets on the Fed’s balance sheet increased by nearly $1.1 trillion in the first three quarters of 2021 to reach approximately $8.5 trillion, or 37 percent of gross domestic product (GDP).

ederal Reserve balance sheet assets… Source: Bloomberg


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