Federal Reserve Reduces Quantitative Tightening to $5B/Month, Balance Sheet to Remain Enlarged

The Federal Reserve has reduced its quantitative tightening (QT) program to $5 billion per month, ensuring that the balance sheet will remain bloated. The analysis breaks down the Fed balance sheet in detail, showing different parts of the balance sheet and how they have changed over time. It also examines historical interest rate trends.

The Federal Reserve (Fed) has announced a significant reduction in its quantitative tightening (QT) program, lowering the monthly runoff to $5 billion. This move aims to ensure that the Fed's balance sheet remains bloated, a strategy that has been the subject of considerable debate among economists and financial professionals.

Impact on Balance Sheet

The current size of the Fed's balance sheet stands at $6.6 trillion, which would take over a century to fully wind down at the new $5 billion per month pace [1]. The Fed has been reducing the pace of runoff, but it has not yet reached the target rate. The weekly activity in the balance sheet has been consistent, with large chunks of assets rolling off at regular intervals [1].

Historical Context

The Fed's use of the balance sheet has evolved significantly since the Global Financial Crisis. The usage of the balance sheet has increased dramatically since then, and the current reduction in QT is a step towards unwinding some of these holdings [1].

Interest Rate Trends

Interest rates have been fluctuating within a range of 3.25% to 4.75% since September 2022. The 30-year Treasury yield recently broke out of this range, signaling a lack of interest in long-term US government debt [1]. The spread between the 2-year and 10-year Treasury yields has turned positive, a potential indicator of an upcoming recession, which typically occurs 6 to 18 months after the spread turns positive [1].

Fed's Financial Performance

The Fed has been remitting net earnings to the Treasury, totaling nearly $100 billion per year. However, the Fed has recently started to incur losses, resulting in a negative balance that has exceeded $229 billion [1]. This negative balance is a result of the Fed printing money to cover its losses, a strategy that has been a subject of debate among economists.

International Holdings

International holdings of US Treasuries have increased by over $750 billion over the past year, with notable increases from countries such as Norway, Cayman Islands, UK, Switzerland, and Canada. However, this increase pales in comparison to the total amount of debt issued by the Treasury, which is closer to $2 trillion [1].

Conclusion

The Fed's decision to slow its QT program to $5 billion per month is a significant move that aims to manage the balance sheet and interest rates. While the long-term impact of this strategy remains to be seen, it is clear that the Fed is taking a cautious approach to unwinding its balance sheet. Investors and financial professionals should closely monitor the developments in the Fed's balance sheet and interest rate policies, as they have significant implications for the broader economy.

References:

[1] https://www.moomoo.com/news/post/55280766/record-tr4cking-news-default
[2] https://www.schiffgold.com/commentaries/the-fed-drops-qt-to-5b-a-month-ensuring-the-balance-sheet-will-stay-bloated
[3] https://seekingalpha.com/article/4791405-fed-drops-qt-5b-a-month-ensuring-balance-sheet-stay-bloated