Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

The Fed has Missed the Balance Sheet Mortgage Back Security Reduction Target Reduction Every Single Month

  by    0   2

The Fed has a targeted balance sheet reduction of $95B a month. After reaching and exceeding this target last month, the Fed is back to undershooting.

This should not come as a surprise given the turmoil in the bond market this year and the lack of liquidity.

Figure: 1 Monthly Change by Instrument

The table below details the movement for the month:

    • The Treasury market saw increases on the long end but decreases on the short end
        • This is a bit surprising as it will only create a larger yield curve inversion
    • MBS fell short again of the $37.5B target by more than 50%
        • The Fed has not come close to hitting the MBS target for a single month so far

The challenge in MBS is more obvious because of the massive change in the mortgage market this year. As interest rates have risen, the housing market has come to a standstill.

Figure: 2 Balance Sheet Breakdown

Looking at the weekly data shows that activity has been very quiet over the last 4 weeks with little movement in either direction. During December, the busier weeks actually occurred during the holidays with the slow weeks happening in the first two weeks.

Figure: 3 Fed Balance Sheet Weekly Changes

As the Fed continues to miss on the MBS reduction, the overall portfolio allocation of MBS has grown. MBS is up a full percentage point compared to a year ago.

Figure: 4 Total Debt Outstanding

A lost Revenue Source for the Treasury

When the Fed makes money, it sends the Treasury a check. This has been quite substantial over the years, totaling $105B in 2021 and $93B in 2020. That time has come to the end, at least for now. The Fed lost $61B in December on the heels of losing $41B in November.

According to Reuters, the Fed has been warning about this possibility for some time. It should be noted, the Fed will not send the Treasury a bill to cover its losses. Instead, it will book the losses into a deficit account that will be held until the Fed makes enough money to make up for its losses.

Making up the losses could be years away, which means the Treasury has just lost a major source of extra revenue. This will only make future Treasury deficits worse.

Figure: 5 Fed Payments to Treasury

When looking at the yearly data, the issue is even more obvious. 2022 is net negative by $53B despite having 8 positive months from Jan-Aug. Based on the current trajectory, 2023 could be negative by over $500B! This would wipe out 6 years of gains!

Figure: 6 Fed Payments to Treasury

The Fed is losing money because it pays financial firms for keeping assets on the Fed books. As interest rates have risen, the amount it pays out has also risen. It also loses money when it buys bonds at high prices and sells them at low prices, which is what has unfolded with QE and QT. As the chart below shows, interest rates have risen dramatically in recent months, despite the recent pullback.

Figure: 7 Interest Rates Across Maturities

Short-term rates are rising even faster than long-term rates, which has created an inverted yield curve. After bottoming at -84bps on Dec 7, it has since rebounded to only -43bps. It still has a long way to go before it is upward-sloping again.

Figure: 8 Tracking Yield Curve Inversion

The chart below compares the yield curve at three points in time (current, 1 month ago, and 1 year ago). Over the last month, there has been little change, but compared to 1 year ago, the curve has seen a dramatic change. This was before any rate hikes had started.

Figure: 9 Tracking Yield Curve Inversion

Who Will Fill the Gap?

Bloomberg recently published an article that shows how the typical Treasury buyers have all stepped back from the market. First and foremost, this includes the Fed which has been the biggest buyer in the market for two years. It also includes institutional investors and foreign countries.

As shown below, the international holders have completely stopped buying and have reduced holdings. Total international holdings are at $7.2T, down from $7.85T less than 1 year ago in November 2021.

Note: data was last published in October

Figure: 10 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 $550B! The bigger area of concern though is that China and Japan are down a combined $400B. Behind the Fed, China and Japan had been some of the biggest buyers. Not anymore!

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 last balance sheet reduction was two years, going from Sept 2017 to Sept 2019.

The current reduction has only been underway for 9 months, but it seems quite likely that something will break well before the Fed has two years of reductions under its belt.

Figure: 12 Historical Fed Balance Sheet

What it means for Gold and Silver

Things are getting very tricky for the Fed. While they seem content to lose billions of dollars each month, they must realize the impact they are having on the Treasury. Not only has the Treasury lost a major source of funding, but the upward pressure on interest rates is creating havoc due to higher interest expense.

The Fed is struggling to keep QT going because it simply cannot let that much debt mature without having a major impact on the market. With liquidity drying up and a stock market that looks to be on edge, the Fed is getting closer and closer to a major event happening somewhere in the economy.

When something breaks, it is going to break big. At that point, the balance sheet could well exceed $10T in short order. Gold and silver will offer excellent protection given such an event.

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: Dec 28, 2022

Interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/

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

Comex Delivery Volumes Reach Highest Levels in Months

The CME Comex is the Exchange where futures are traded for gold, silver, and other commodities. The CME also allows futures buyers to turn their contracts into physical metal through delivery. You can find more details on the CME here (e.g., vault types, major/minor months, delivery explanation, historical data, etc.).

READ MORE →

Federal Budget: Interest Payments Reach $750B

Federal Budget The Federal Government publishes the spending and revenue numbers every month. The charts and tables below give an in-depth review of the Federal Budget, showing where the money is coming from, where it is going, and the surplus or deficit. This month saw a $22B deficit.

READ MORE →

Jobs: The Household Survey Tells a Different Story

The analysis below covers the Employment picture released on the first Friday of every month. While most of the attention goes to the headline number, it can be helpful to look at the details, revisions, and other reports to get a better gauge of what is really going on. 

READ MORE →

Janet Yellen Bets $2T that Rates Will NOT be Higher For Longer

A Major Trend Change  In 2023, the Treasury added $2.6T to the national debt. While that number alone should be enough to scare anyone, the details reveal something even more concerning. $2T of it, or 77%, was financed entirely with short-term Treasury Bills maturing in less than a year. The chart below shows the debt […]

READ MORE →

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 […]

READ MORE →

Comments are closed.

Call Now