This week, the focus of the market has been on the expectation of a Fed rate hike, almost ignoring that the Fed's balance sheet reduction is also accelerating.
According to the Fed's weekly balance sheet, total assets fell by $42.6 billion last week, the biggest weekly decline since May. In June, the Fed's total assets fell by $87 billion.
Currently, the Fed's balance sheet is $8.298 trillion, the lowest level since August 2021.
Although the Fed's balance sheet expanded by $391 billion at the height of the banking crisis in March, in the 15 weeks since then, the Fed has shrunk assets by $435 billion, the fastest 15-week decline on record, as quantitative tightening (QT) continues and banking liquidity support measures continue to ease.
Compared with the peak in August 2021, the Fed has "reduced" its balance sheet by $667 billion.
The analysis pointed out that during the QT period in 2018-2019, the Fed's balance sheet shrank by $688 billion, and this QT, which lasted only 12 months by the end of this month, is expected to be larger than the last balance sheet reduction during the entire QT period.
QT continues
The Fed has now dumped 20.5% of the US Treasuries it bought during the pandemic quantitative easing.
The Fed's current holdings of $5.11 trillion in U.S. Treasuries were reduced by $58 billion in June, a total reduction of $665 billion from its peak in June 2022.
Holdings of mortgage-backed bonds (MBS) of $2.54 trillion fell by $20 billion in June and were $202 billion less than the peak.
The decline in MBS is well below the $35 billion monthly cap, as principal payments to the Fed have been slow due to falling home sales and plummeting refinancings and fewer mortgages being repaid.
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