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 that this was moving forward as expected, mostly coming in under the target amount. However, in November there was a large increase in the amount of balance sheet run-off but was not concentrated in one particular security type.

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. As shown, the change here was from a massive move that took place the week of Nov. 20.

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 early last year. All of the programs have dropped down to zero except the Bank Term Funding Program (BTFP). The BTFP was the program that allowed banks to value their Treasury assets at par for up to one year. As shown, the value of the program stayed elevated for longer but has dropped down closer to zero in recent months.

Figure: 4 Loan Details

Yields

Yields started falling in anticipation of the Fed rate cuts but have been rising ever since rumor became fact in September. The bottom of rates was on Sept 16 just before the Fed meeting.

Figure: 5 Interest Rates Across Maturities

The spread between the 2 year and 10 year has finally turned positive. When the inverted yield curve predicts recession, the recession does not usually occur until sometime after the spread turns positive. This could be a bad sign for the months ahead.

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 short-end coming down while the long-end has remained mostly flat.

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 $210B! 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 over $600B. Unfortunately, this pales in comparison to the amount of debt issued by the Treasury overall which is closer to $2T.

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

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 $160B. 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.

Figure: 12 Historical Fed Balance Sheet

Data Source: https://fred.stlouisfed.org/series/WALCL and https://fred.stlouisfed.org/release/tables?rid=20&eid=840849#snid=840941

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

Last Updated: Nov 27, 2024

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