While Fed Talks About Taper, Balance Sheet Grows $111 Billion in August
The Fed balance sheet stands at $8.33 trillion, up $111 billion from the prior month-end.
The chart below shows how the Fed Balance sheet has grown by instrument over the last 18 months. The major surge from COVID can be clearly seen as $2.5T was added within 2 months. The monthly changes since then reflect QE on autopilot.
Autopilot targets about $120B in monthly purchases split by $40B in MBS and $80B in US Treasuries. As the numbers show, this is not exact, but an approximation. The latest month added $53B in MBS and almost $85B in Treasuries, offset by “Other” dropping $24.6B
The “Other” category surged and fell last year due to Repurchase Agreements. This is the opposite of the Reverse Repos shown in the Money Supply article. In standard Repo Agreements, the Fed buys from a dealer with an agreement to return the security. This was designed to be temporary in nature rather than a permanent addition to the balance sheet. These repurchase agreements put a floor under the treasury market by providing unlimited liquidity.
Figure: 1 Monthly Change by Instrument
The table below shows the breakdown of holdings by instrument and the period over period change as indicated. The main takeaways:
- The balance sheet has grown by $1.34T over the last year, averaging about $112B a month rather than the target of $120B
- More recent months are trending above this average, except the latest month of $111B
- The balance sheet grew by $4T over 3 years, the majority of which occurred since the start of Covid
- In the latest month, the Fed changed gears and added $36B of debt maturing < 1 year and did not add to debt maturing in 1-5 years which has been its biggest growth line item across Treasuries
- The $36B added in one month is 1/3 of the amount added over the last year ($109B)
- Almost 40% of the Treasury Balance sits in 1-5 year maturing debt with 40% in 5+
- MBS has grown by $489B over the last year and Treasuries have grown almost $1T
Figure: 2 Balance Sheet Breakdown
The chart below shows the relative (percent) distribution by product. While absolute values have increased quite significantly as shown in the table above, the distribution of holdings has changed some. MBS made up 40% of the balance sheet 3 years ago, but the number has fallen to under 30% as short term (<1 year) and medium-term (5-10 years) has increased from 10% to 13% and 6.4% to 11.8% respectively.
Figure: 3 Total Debt Outstanding
Zooming into weekly
Another chart to look at is the weekly change in the balance sheet. Anyone who follows the balance sheet closely will notice it dips once a month before jumping back up. The chart below shows how the fed balance sheet changes week over week. As seen, there are a few consistent trends:
- A series of MBS Mature about every four weeks
- This results in a slight decrease in the balance sheet for that week
- A bulk of MBS is also bought every 4 weeks that is larger than the maturing MBS
- This creates a surge in the balance sheet for that week
- Treasury securities mature and are purchased with less volatility
The latest week saw $27B in MBS mature versus $80B purchased in the previous week. Debt maturing in 1-5 years also shrunk by a rather large $31B in the previous week.
Figure: 4 Fed Balance Sheet Weekly Changes
The table below shows how the latest week compares to the weekly averages over 4, 24, 52, and 156 (3 years) weeks. The weekly averages are shown to gauge whether the current periods (1 and 4 weeks) are accelerating or decelerating.
The Fed has averaged about $28B per week for 4 weeks which is less than the $35B a week in the prior period. The latest 4-week period ($28B per week) is slightly below the 24-week period ($31.3B).
Figure: 5 Average Weekly Change in the Balance Sheet
The Fed is clearly monetizing US Debt. The chart below uses data from the debt analysis and matches it up with the Fed balance sheet holdings. While this is not a perfect one-to-one match due to the nature of reporting, the outcome can be seen below. This chart focuses specifically on Treasury securities: Bills (<1 Year maturity), Notes (1-10 years), and Bonds (10+ years). This is the bulk of debt issuance and Fed purchases.
As can be seen below the Fed has monetized a large percentage of debt issued since Jan 2020. The focus is clearly seen in Notes and Bonds to keep a lid on long-term rates. The first chart shows the debt added by the Treasury in each of the last 4 years by instrument. The bottom chart shows the percent of that debt the Fed has purchased. In 2020, the Fed monetized more than 100% of notes and 90% of bonds. In 2021 those numbers have fallen to 37% and 47% respectively (slightly higher since the last period). While not a complete monetization, this is still massive in terms of scope.
Figure: 6 Debt Issuance by Year and Instrument
Figure: 7 Fed Purchase % of Debt Issuance
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.
There is no way the Fed will come close to shrinking the balance sheet at this stage. With more Fiscal spending on the horizon and an economy addicted to low-interest rates, it is probable that the growth of the balance sheet may accelerate rather than decelerate.
Figure: 8 Historical Fed Balance Sheet
What it means for Gold and Silver
The Fed is in a box. They cannot let interest rates rise or else the entire economy will come crumbling down, but if they keep the monetary stimulus flowing then inflation will most likely spiral. As shown above, they have monetized a huge amount of the US Debt this year (~40%). The government needs this monetary support or else rising long-term rates will put pressure on the Federal Deficit.
The Fed can talk about tapering and even make attempts to do so, but they will inevitably reverse course and begin expanding their balance sheet by more than $120B a month. This will continue driving the Money Supply higher putting downward pressure on the dollar and upward pressure on inflation. Do they have the tools to fight inflation? Absolutely. But the implications of doing so are so politically devastating that they will choose higher inflation over a collapsing economy. Gold and silver will provide excellent protection during this time.
Data Updated: Weekly, Thursday at 4:30 PM Eastern
Last Updated: Aug 25, 2021