US: Fed Balance Sheet

Thu Jun 14 15:30:00 CDT 2018

Actual Previous
Level $4.325T $4.319T
Total Assets - Weekly Change $5.7B $-8.3B
Reserve Bank credit - Weekly Change $3.0B $-10.2B

The Federal Reserve's assets totaled $4.325 trillion in the June 13 week, up $5.7 billion from the prior week and down $135.5 billion from the beginning of balance sheet unwinding in October 2017.

Treasury holdings were $2.378 trillion in the June 13 week and down $87.5 billion since October. Treasuries are scheduled to decline another $21 billion to $2.357 trillion by the end of this month.

Holdings of mortgage-backed securities remain especially high, at $1.740 trillion which is up in the week and down only $28.4 billion since October. To meet its month-end target of $1.696 trillion, the Fed, in the next couple of weeks, would have to let $44 billion of MBS run-off without reinvesting. That would be more than it has run off to date. Note that mortgage-backed unwinding can be uneven due to unscheduled prepayments of principal as well as timing differences in payments and settlements.

MBS was in fact the largest factor adding reserves, not draining reserves, in the latest week, up $5.1 billion.

Reserve Bank credit for the June 13 week increased $3.0 billion after decreasing $10.2 billion in the prior week.

The Fed's balance sheet is a weekly report presenting a consolidated balance sheet for all 12 Reserve Banks that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. The report is officially named Factors Affecting Reserve Balances, otherwise known as the "H.4.1" report.

In September 2017, the Fed announced a program to reduce its balance sheet by the gradual reduction of both its Treasury and mortgage-backed security holdings. The monthly reductions, executed by reinvesting a decreasing amount of maturing securities, began in October 2017 and will gradually increase in size before hitting a plateau in October 2018 where they will hold until the FOMC judges that the Fed is holding no more securities than necessary. Under the schedule for 2018, the Fed's Treasury holdings will be reduced by $270 billion while holdings of mortgage-backed securities will be reduced by $180 billion.

This report is likely to get increasing attention as the Federal Reserve normalizes its balance sheet, that is reduce it from the $4.5 trillion peak reached in October 2014. This peak was reached after the Fed, in an effort to hold down long-term interest rates and in turn stimulate the economy, began in late 2008 the direct purchases of U.S. Treasuries and mortgage-backed securities in unconventional policy known as quantitative easing. The complete unwinding is expected to take several years with the final balance sheet total still not targeted but widely projected in the $2.5 trillion area. The impact of the process, if any, would likely first be felt in the Treasury and mortgage-backed markets, where there will be one less major buyer, with ripples following in other markets including stocks. This is the first such unwinding of its size attempted by a central bank.