Contact us
CALL US NOW 1-888-GOLD-160

Surprise! Another Month = Another Failed Attempt at QT

  by    0   0

The Fed has found it easier to raise rates than shrink its balance sheet. September was supposed to be the month when the Fed got serious about shrinking the balance sheet. After a few months of warming up with $47.5B monthly reductions, the Fed was going to step up in September and shrink by $95B ($60B in Treasuries and $35B in MBS).

That didn’t happen.

Breaking Down the Balance Sheet

In the prior four months, the Fed only hit the $45B target a single time – last month. It should be no surprise then that September fell woefully short of the target, seeing only a $31B reduction. Even this meager run-off has created chaos in the Treasury market with the yield curve seeing pronounced volatility in recent weeks. Given the environment, how long until the Fed follows in the BoE footsteps and re-enters the market, using “crisis mode” as the excuse? Given the mathematical impossibility the Treasury faces in the months ahead, it won’t be too long!

Figure: 1 Monthly Change by Instrument

The table below details the movement for the month:

    • The Treasury market only saw reductions in securities maturing in less than 5 years
        • Only $23.2B rolled off, which represents 38.7% of the target
    • MBS was even worse with $11.1B rolling off which represents 31% of the target

Figure: 2 Balance Sheet Breakdown

Looking at the weekly data shows that the first two weeks of September (third and fourth from the right) were extremely muted. It wasn’t until the last two weeks that the balance sheet saw any meaningful reduction.

Figure: 3 Fed Balance Sheet Weekly Changes

The bond market is mostly responding to the rate hikes, but the Fed’s attempt at QT will only exacerbate the carnage shown below. Things have really accelerated in the last few weeks as shown by the massive spike in yields below. This is an unprecedented move in a typically safe-haven market. And to reiterate, this is with the Fed avoiding the QT it promised to markets!

Figure: 4 Interest Rates Across Maturities

This is showing up in the yield curve spread between the 10-year and 2-year. The curve has been strongly inverted since July 4th.

Figure: 5 Tracking Yield Curve Inversion

Looking at the entire yield curve shows how much has changed over the last month and year. The entire curve has shifted up in the last month by about 55bps and is well above and flatter than the at the same point last year. Several maturities are popping above 4%!

Figure: 6 Tracking Yield Curve Inversion

Who Will Fill the Gap?

As the Fed leaves the market and enters as a seller, someone will need to step in and purchase the debt the Fed has been buying. The chart below looks at international holders of Treasury securities. International holdings continue to fall, though there was a slight uptick in the most recent month.

China is still less than $1T and Japan actually saw a very minor reduction MoM.

Note: Data was last published as of July

Figure: 7 International Holders

The table below shows how debt holding has changed since 2015 across different borrowers. The net change over the last year is a reduction of $100B. The YoY reduction from both China and Japan can be seen clearly below.

Figure: 8 Average Weekly Change in the Balance Sheet

Historical Perspective

The final plot below takes a larger view of the balance sheet. It is clear to see how the usage of the balance sheet has changed since the Global Financial Crisis. The tapering from 2017-2019 can be seen in the slight dip before the massive surge due to Covid. It’s highly unlikely the new round of QT will last as long or shrink the balance sheet as much as it did in 2018. Furthermore, the current QT pales in comparison to the growth of the balance sheet seen in the latest QE binge.

During the last QT period, the Fed shrunk its balance sheet by ~15%. A similar reduction would be $1.34T. Even if QT hits full speed at some point, it would take more than a year. Will the Fed continue QT as the economy flounders in recession and potentially dips into depression territory?

Figure: 9 Historical Fed Balance Sheet

What it means for Gold and Silver

The Fed has continued to talk tough and deliver on promised rate hikes. Quantitative Tightening has been a different story though. The Fed has failed to deliver in 4 of the last 5 months. The bond market is an absolute disaster so it shouldn’t be a surprise that the Fed is not very trigger-happy.

The BoE stepped in this week to relaunch QE for a “brief” time until it can get back to QT. The problem is that QE is the crisis. Thus, with every new QE program, central banks will have to continue doing more or risk unleashing complete havoc.

Unlike the BoE, the Fed has escaped a major catastrophe so far. But it’s only a matter of time until something breaks. And even if a miracle does happen and no major event blows up in the next few months, the Fed will still have to contend with the Treasury entering a debt spiral.

None of this bodes well, which is exactly why the Fed will relaunch QE sooner than most think. When the Fed does pivot, gold and silver will be set to take-off. That’s when the market should finally realize that inflation is here to stay and there is nothing the Fed can do about it.

Data Source: and

Data Updated: Weekly, Thursday at 4:30 PM Eastern

Last Updated: Sep 28, 2022

Interactive charts and graphs can always be found on the Exploring Finance dashboard:

Download SchiffGold's Free Silver Report

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Related Posts

Fed Misses the Target Again

The Fed managed to reduce its balance sheet by $45 billion last month. The majority of this was in Treasuries of 1-5 year maturities with a reduction of $55B. The next biggest reduction was in mortgage-backed securities MBS totaling $20 billion. This fell short of the target of $35 billion. In fact, the Fed has […]


Rebound in Money Supply Will Prove Too Little, Too Late

Seasonally Adjusted Money Supply in May increased $131B. This is the first growth in adjusted M2 since last July and the largest increase since December 2021.


The Technicals: Gold Correction Is at or Near Completion

With a hawkish Fed and dollar strength, gold has dropped below $1,950 an ounce, but the technicals appear to indicate that we are at or near the end of a correction. The technical analysis last month was published when gold was around $1975 and concluded: The indicators are now mostly neutral with a bearish lean. There are […]


Comex Countdown: The Pressure Grows in Silver and Platinum

June is wrapping up strong for gold at the COMEX with 20,101 contracts being delivered. There are still 583 contracts open that have not been delivered, but the majority of the contracts have been completed. Meanwhile, were seeing more and more stress on silver and platinum.


Comex Now Has 28 Paper Claims for Each Physical Ounce of Registered Silver

The bleed of metal from COMEX vaults has resumed and silver inventories have hit record lows with 28 paper claims for each ounce of physical silver. This analysis focuses on gold and silver within the Comex/CME futures exchange. See the article What is the Comex? for more detail. The charts and tables below specifically analyze the physical […]


Comments are closed.

Call Now