The Fed Dramatically Slows the Pace of QT

The following analysis breaks down the Fed balance sheet in detail. It shows different parts of the balance sheet and how those amounts have changed. It also shows historical interest rate trends.

Breaking Down the Balance Sheet

Back in May, the Fed announced a reduction in QT from $95B to $60B. The data shows this change took effect immediately in June as the Fed balance sheet shrunk by $55B or less in the last three months.

Figure: 1 Monthly Change by Instrument

The table below provides more detail on the Fed’s QT efforts.

Figure: 2 Balance Sheet Breakdown

The weekly activity can be seen below. It is difficult to tell if the Fed is rotating the securities on the balance sheet or simply re-categorizing bonds as they get closer to maturity.

Figure: 3 Fed Balance Sheet Weekly Changes

The chart below shows the balance on detailed items in Loans and also Repos. These were the programs set up in the wake of the SVB collapse last year. Three of the four programs have dropped close to zero, but the Bank Term Funding Program (BTFP) remains elevated. The BTFP was the program that allowed banks to value their Treasury assets at par for up to one year. That amount has started dropping some after the 1 year period expired, but has remained close to $100B since, showing not all the stress has been removed from the banking system.

Figure: 4 Loan Details

Yields

Yields have fallen across the board in recent weeks.

Figure: 5 Interest Rates Across Maturities

The spread between the 2-year and 10-year has finally reached parity for the first time since July 2022.

Figure: 6 Tracking Yield Curve Inversion

The chart below shows the current yield curve, the yield curve one month ago, and one year ago. It is clear to see the curve has moved down across the board in the most recent month.

Figure: 7 Tracking Yield Curve Inversion

The Fed Takes Losses

When the Fed makes money, it sends it back to the Treasury. This has netted the Treasury close to $100B a year. This can be seen below.

Figure: 8 Fed Payments to Treasury

You may notice in the chart above that 2023 and 2024 are showing $0. That’s because the Fed has been losing money. According to the Fed: The Federal Reserve Banks remit residual net earnings to the U.S. Treasury after providing for the costs of operations… Positive amounts represent the estimated weekly remittances due to U.S. Treasury. Negative amounts represent the cumulative deferred asset position … deferred asset is the amount of net earnings that the Federal Reserve Banks need to realize before remittances to the U.S. Treasury resume.

Basically, when the Fed makes money, it gives it to the Treasury. When it loses money, it keeps a negative balance by printing the difference. That negative balance has just exceeded $193B! This negative balance is increasing by about $10B a month!

Figure: 9 Remittances or Negative Balance

Who Will Fill the Gap?

The Fed has not been buying in the Treasury market for over a year (they have been selling); however, the Treasury is still issuing tons of new debt. Who has been picking up the slack since the Fed stepped away?

International holdings have increased a decent amount over the last year by about $500B. This is a decent uptick, but the pop has mostly flattened out for the last 6 months suggesting no new buying across international holders.

Note: data is updated on a lag. The latest data is as of June

Figure: 10 International Holders

It should be noted that China continues to reduce holdings of US Treasuries. They have dropped $300B since 2020, while Japan has fallen $140B. The slack has been picked up by other countries, especially Canada and the UK.

Figure: 11 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 recent moves by the Fed in the wake of the SVB collapse can also be seen below. When the next break in the economy occurs, it’s likely that the balance sheet will spike again.

Figure: 12 Historical Fed Balance Sheet