Fed’s Assets Retreat To Level Of 5 Weeks Ago

Total assets on the Fed’s weekly balance sheet as of April 20, released this afternoon, declined to $8.955 trillion, roughly the same as on March 16 and below the levels of March 23 and April 13. Beyond the week-to-week ups and downs, caused by the peculiarities of Mortgage Backed Securities (MBS), which we’ll get to in a moment, the balance sheet has flattened out. Balance sheet growth has ended. QE has ended. That part of the marvelous show is over.

Since March 2020, when this whole money-printing orgy began, the Fed has increased its assets by $4.65 trillion, a mind-boggling amount of QE in the span of just two years. QE was designed to repress long-term Treasury yields, mortgage rates, long-term interest rates of any kind, and to inflate asset prices. It thereby created the biggest wealth disparity ever, documented by my Wealth Disparity Monitor, based on the Fed’s own data.

But then raging inflation got in the way. And the Fed finally started “tapering” its asset purchases in mid-November. Tapering means that the Fed bought less of Treasury securities and MBS than it did before tapering, when it was increasing its assets by about $120 billion a month. After the tapering began this monthly increase began to shrink. Now the balance sheet is no longer increasing, tapering is finished, and QE has ended.

Now markets started to kiss that easy money goodbye. The bond market has been getting hammered since last year. The stock market has been getting hammered since January this year, and numerous stocks have imploded.

The Fed has also unwound and brought to zero numerous of its emergency measures that it had started in the spring of 2020, including its repos, which it ended in mid-2020, and its corporate bonds and bond ETFs, of which it never bought much to begin with. We’ll get to them in a moment.

Since the beginning of March 2020, the Fed’s holdings of Treasury securities have ballooned by $3.24 trillion, to a total of $5.76 trillion. The balance has now remained roughly flat for several weeks.

In order to maintain the balance of Treasury securities at the current level, as maturing securities come off the balance sheet, the Fed buys new Treasury securities in the amounts needed to replace the maturing securities.

The $5.76 billion of Treasury securities include Treasury Inflation-Protected Securities (TIPS) and the accumulated Inflation Protection on those TIPS. The government compensates TIPS holders for CPI inflation by increasing the principal of the TIPS. The Fed tracks this “Inflation Protection” amount separately from the face value of the TIPS. On its balance sheet today:

The Fed’s holdings of MBS dipped to $2.73 trillion on the balance sheet today, and was roughly flat with the balance on March 16. Since March 2020, the Fed has added $1.36 trillion in MBS. MBS differ from regular bonds in that holders receive pass-through principal payments when the underlying mortgages are paid off after the home is sold or the mortgage is refinanced, or when regular mortgage payments are made. As a passthrough principal payment is made, the balance of the MBS shrinks by that amount.

During period of low and declining mortgage rates, such as during the pandemic, mortgage refis are a huge thing, and the passthrough principal payments become a torrent, and the balance of each MBS shrinks rapidly.

Conversely, the surging mortgage rates now have largely killed refis, and pass-through principal payments have slowed down.

Trades in the TBA market take one to three months to settle. The Fed books its trades after they settle. So, when the Fed was three months into the taper, that’s when the first tapered MBS purchases started showing up on its balance sheet. This is delayed data. And the MBS on the Fed’s balance sheet kept rising at the pace of purchases two to three months earlier.

In addition, the timing of the passthrough principal payments and the settlement of the purchases don’t match from week to week. So, the Fed’s balance of MBS jumps up and down from week to week.

By now, most of the delayed settlements of the taper MBS purchases have been booked, though there might still be some stragglers out there. And the balance of MBS, despite the ups and downs from week to week, is roughly flat with March 16:

This is the net amount that the Fed paid in “premiums” over face value and paid in “discounts” below face value when it purchased Treasury securities, MBS, and agency securities in the market. The Fed books the securities at face value and books the premium and discount separately.

The Fed is still offering repos but has raised the rate it charges to be unattractive (currently 0.50%), and there have been no takers since July 2020, when the balance fell to zero.

The Fed lends cash to counterparties in the repo market, in exchange for collateral (Treasury securities or MBS). Repos are in-and-out transactions. On their maturity date – the next business day for overnight repos, or longer for term repos – the Fed gets its cash back, and the counterparty gets its security back. Repos are a quick way for the Fed to send lots of liquidity to the markets and take it out when the repos mature.

The Fed has been offering dollars to 14 other central banks via “central bank liquidity swaps,” in exchange for their currency, to provide dollars to those economies for their dollar-funding requirements. The Fed did this during the Financial Crisis in 2008-2010, during the Euro Debt Crisis in 2011-2013, and during the pandemic.

Almost all of those swaps have matured and were unwound, with the Fed getting its dollars back, and the other central banks getting the local currency back. Only a minuscule $233 million of swaps remain outstanding:

Special Purpose Vehicles (SPVs) are legal entities (LLCs) that the Fed set up during the crisis to buy assets that it was not allowed to buy otherwise. Equity funding was provided by the Treasury Department, which would take the first loss on those assets. The Fed lends to the SPVs, and shows these loans and the equity funding from the Treasury Dept. in these SPV accounts.

The PPP loans that the Fed bought from the banks account for $22 billion, about half of the total SPVs, down from $90 billion in July 2021. Over the summer and fall of 2021, the Fed sold all of its corporate bonds and bond ETFs into the hottest corporate bond market ever, and they’re gone (yellow columns, CCF). The remainder are the Main Street Lending Program ($12 billion), Municipal Liquidity Facility ($7 billion), and TALF ($2 billion):

In addition to having fueled the worst inflation in 40 years, the past two years of the Fed’s QE and interest rate repression have created the worst wealth disparity ever, based on the Fed’s own data on the distribution of wealth in the US. The ultimate outcome of the Fed’s reckless money printing is raging inflation.