US: Fed Balance Sheet


December 30, 2021 03:30 CST

Definition
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. Also bulking up the balance sheet would be repurchase agreements, which the Fed started to conduct in September 2019 to add liquidity to the cash-strapped repo market by lending cash in exchange for Treasuries. To ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures , the Fed said it would continue to conduct term and overnight repurchase agreement operations at least through January 2020, later extended in the implementation note of the January 2020 FOMC statement to at least through April 2020.

Description
This report has received increased attention as the Federal Reserve normalized its balance sheet, that is began to 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 was expected to take several years with the final balance sheet total not targeted but widely projected in the $2.5 trillion area. The impact of the process, if any, was likely first be felt in the Treasury and mortgage-backed markets with ripples possibly following in other markets including stocks. It was the first such unwinding of its size attempted by a central bank.

The Fed announced its unwinding or "quantitative tightening" program to reduce its balance sheet through the gradual reduction of both its Treasury and mortgage-backed security holdings in October 2017. The monthly reductions were to be executed by reinvesting a decreasing amount of maturing securities, beginning in October 2017 and gradually increasing in size before hitting a plateau in October 2018 at $30 billion per month for Treasuries and $20 billion per month for MBS.

The program proceeded roughly according to plan but 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 was 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 would 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. The final tally showed the aborted balance sheet reduction program was at least a partial success, at $3.762 trillion down $698.9 billion from the level at the start of the unwinding in October 2017.

But 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, ultimately to around the level at the beginning of the unwinding in October 2017, by starting, on October 15, 2019, 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. Also bulking up the balance sheet would be repurchase agreements, which the Fed started to conduct in September 2019 to add liquidity to the cash-strapped repo market by lending cash in exchange for Treasuries. To ensure that the supply of reserves remained ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures, the Fed said it would continue to conduct these term and overnight repurchase agreement operations at least through January 2020, and later, in the implementation note of the January 2020 FOMC statement, extended the period to at least through April 2020.