US: Fed Balance Sheet

October 1, 2020 03:30 CDT

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 of quantitative tightening to reduce its balance sheet through 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 gradually increased in size before hitting a plateau in October 2018 at $30 billion per month for Treasuries and $20 billion per month for MBS. In January 2019, the Fed indicated that it would likely bring the program to a close by the end of the year, and in May 2019, the Fed cut the monthly reduction cap for Treasuries to $15 billion and announced it would end the program in September. In its July 31, 2019 FOMC statement, the Federal Reserve announced it is concluding the balance sheet reduction of its aggregate securities effective August 1, 2019, two months earlier than previously indicated. As of this date, all principal payments of maturing Treasuries held by the Federal Reserve will be rolled over at auctions. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will be reinvested in Treasury securities to match the maturity composition of Treasury securities outstanding, while principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. On October 11, 2019, the Fed announced - while emphasizing its technical nature involving no monetary policy change - that it will begin increasing its balance sheet again starting on October 15 with projected monthly T-bill purchases of around $60 billion until at least the second quarter of 2020. The Fed said it was taking the action to ensure ample reserves in the banking system, evidently in response to recent disruptions in the repo market due to a lack of liquidity.

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 with ripples possibly following in other markets including stocks. This is the first such unwinding of its size attempted by a central bank.