Every month since April of 2022 the Fed has been slowly unwinding QE that it should not have done in the first place. 
Total Balance Sheet Reduction
Since April 13, 2022 the Fed has reduced its balance sheet from $8.965 trillion to $6.856 trillion.
That’s a reduction of $1.801 trillion in 2.66 years.
The normal level before the Great Recession was about $860 billion.
This balance sheet reduction is called Quantitative Tightening (QT). It’s the opposite of balance sheet expansion called Quantitative Easing (QE).
Reverse Repo Reduction
Reverse repos have fallen from $2.320 trillion to $0.456 trillion. Thus most of the reduction has been in reverse repos.
Mortgage Backed Securities Reduction
Since April 13, 2022 the Fed has reduced its MBS balance sheet from $2.740 trillion to $2.245 trillion.
That’s a reduction of $0.495 trillion in 2.66 years.
This is best described as a joke because the normal Fed holding of MBS is $0.000 trillion.
Fed’s Balance Sheet by Duration
Nearly all of the Fed’s MBS portfolio has a duration of 10 years or greater.
The Fed will not sell MBS outright to stick to its announced schedule because that would pressure mortgage rates higher.
Thus, the Fed portfolio reduction is entirely short term runoffs (of which there is a mere $57 million potential for all of 2025), plus any sales of homes on which the Fed holds the mortgage paper.
Reducing the Runoff
On May 1, 2024, Reuters reported the Fed Announces Reduction in Balance Sheet Runoff Pace.
The Fed said that starting on June 1 it will reduce the cap on Treasury securities it allows to mature and not be replaced to $25 billion from its current cap of up to $60 billion per month. The Fed left the cap on how many mortgage-backed securities it will allow to roll off its books at $35 billion per month, and it will reinvest any excess MBS principal payments into Treasuries.
Federal Reserve Chair Jerome Powell, speaking in a press conference following the Fed meeting, said the new caps would likely result in around $40 billion per month in total balance sheet runoff, alluding to how actual reductions in bonds have frequently fallen short of the caps, notably on the mortgage bond side.
Fed officials have been making the case that by moderating the drawdown pace they reduce the risk of unwanted market disruptions of the sort that occurred when they last shrunk their balance sheet. They’ve also noted that by slowing the pace of balance sheet contraction, it may allow them to reduce the overall size of their holdings by a greater degree.
Powell reiterated those views in his press conference, saying “the decision to slow the pace of runoff does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to approach its ultimate level more gradually,” which reduced the risk of market tumult.
At $35 billion per month since April of 2022, the Fed would have reduced it MBS holding by $35 billion * 32 months which is $1.12 trillion.
It’s MBS reduction is much less than half of that. But the Fed says slower means more. Yeah right.
When Might the Fed End QT?
J.P. Morgan asks When might the Fed end its quantitative tightening (QT) program?
Since May 2022, the Fed has reduced its balance sheet by almost $2 trillion3, and it’s similarly been “like watching paint dry.” However, the Fed and market participants are sensitive to avoid another liquidity scare. As such, investors are curious; what might lead the Fed to end its current QT program and how soon?
The RRP [Reverse Repo] is perceived as a measure of “excess’ liquidity meaning there are more dollars in short term vehicles—primarily money market funds—than there are supply of Treasury bills in the open market, and thus Treasury collateral is provided at the Fed via the RRP. However, as the Fed’s balance sheet continues to shrink, the RRP is well on its way to zero. Given this, a continuation of QT could last another three months without hiccup; thereafter, most of the decline in liquidity is likely to be seen in falling bank reserves.
Importantly, regardless of the direction policy needs to go next year, they can only be successful if the market is functioning as intended. Hence, they should learn from their mistakes in 2019 and consider ending QT a bit earlier especially given fiscal policy uncertainty next year.
Ending QT “a bit earlier” means a balance sheet of close to $7 trillion dollars forever.
Meanwhile, please note Reverse Repos have been stick on exactly $456 billion ever since March 13, 2024. What’s up with that?
Two Recession Indicators, What Do They Say Now?
On December 20, I noted Two Recession Indicators, What Do They Say Now?
A pair of very reliable Indicators still suggest recession.
But will it be a stagflation recession with higher interest rates or will it be a deflationary recession?
How about no recession at all with Trump blasting inflation higher until the Fed acts to force one?
All of the above are possible outcomes.
The Fed projects years ahead when the Fed cannot even see three months ahead.
Dear Fed, Please Shut Up Already, Stop the Forward Guidance
On December 21, I commented Dear Fed, Please Shut Up Already, Stop the Forward Guidance
Danielle DiMartino Booth claims the Fed should be cutting more, not less. I have a different suggestion.
The short version of my suggestion for the Fed is “STFU”.
Powell pivoted in 2019 with eventual QE of $80B/month Treasuries and $40B/month corporate bonds plus MBS. Powell left $4T on their balance sheet in 2019, from the $4.5T mortgage crisis QE, that ended in 2014. Powell’s QT of $1.8T in 2 years is a jackrabbit in comparison.
The expedient QT would have been to return corporate bonds. The Fed will own MBS until maturity. These are the worst of the 20- and 30-year tranches the Fed’s broker buddies hurriedly put together before the 2007 mortgage meltdown, when CMOs were selling like crypto currency is now. Catherine Austin Fitts purported some tranches contained a few subprime mortgages with the remainder fictional. A town in California had more mortgages on record than homes. CMOs were monetized and optioned 40 to 1. They were given AAA ratings by all the major credit rating agencies. Which allowed CMOs to be marketed to pension funds. After the crisis all the major credit ratings agencies were fined for their false ratings and CMOs were downgraded to junk.
If a serious recession happened, and these tranches failed, they would be audited and disclosed as shams. All remaining CMOs would be questioned. This is the reason the Fed has inflated housing, and kept it afloat, at the burden of rising consumer prices. Inflated home prices devalues these CMOs. The Fed is half way through 30-year mortgage tranche maturities. It is doubtful they can keep the economy out of recession for the second half.
There is absolutely no chance that the Fed will have completed their QT before the onset of the next financial crisis. I fully expect the Fed’s balance sheet to exceed $15 trillion at its peak in the aftermath of that event, resulting in a gold price of $5,000+/oz.
People like Wolf Richter who follows the Fed balance sheet closely and understands what the Fed means by ample reserves says that it can’t go below low $6T. Therefore, sometime in 2025, they’ll have to stop QT. The real question is will the Fed let RRPOs go to zero before it has to spin up QE and start buying treasuries outside of a recession?
What about liability side of FED’s B/S? $3.25 trillion of reserve balances sitting there and FED pays 4.40%p.a. on them. FRED’s chart tells us that this volume of reserve balances hasn’t changed since May 2023. Does this mean that the economy is struggling to suck in these reserve balances? Why? Because the economy is not growing? Or because reserves’ holders prefer credit risk of FED to credit risk of US government?
I believe that the reserve holders feel there is a general lack of credit-worthy borrowers out there – including Uncle Sam.
Looks like the new debt limit will be breached less than 2 weeks after the new budget resolution takes hold. This is problematic on multiple levels. The US now operates like a banana Republic. Printing more money to keep up appearances. I predict 2025 will be the year that things will end badly. Trump will wish he had not won and was just a private citizen. Much cannot be fixed without drastic impact to the economy.
https://www.bnnbloomberg.ca/investing/2024/12/27/yellen-says-treasury-to-hit-new-debt-limit-in-mid-january/
Jerome Powell is indignant that he will complete his contract. 2025 may make want to quit as the markets are going to make him look like the fool he is.
2019 was just déjà vu. It was a repeat of the initial introduction of interest on reserves that decimated the nonbanks (where the nonbanks shrank by 6.2 trillion dollars while the banks increased by 3.6 trillion dollars). I.e., the IOR was set at a higher rate than short-term interest rates. This acted like the nonbank disintermediation of the MSBs and S&Ls when Reg. Q ceilings were raised from 4.5 to 5.5 percent in December 1965.
Balance sheet needs to shrink more– maybe $5 trillion or so. Some of it can’t shrink because there’s currency in circulation so the Fed needs to offset it. Free money (seignorage) for the US government in that case though, because the offsetting liabilities (physical cash) pay no interest and are sitting in god knows where in Columbia, Mexico, and Argentina.
Fed owning MBS is a joke and a policy disaster, the fact that they own it and need to get rid of it puts a floor under mortgage rates and a ceiling on home prices for the next 10 years.
Btw the data source you have on reverse repo is stale, here’s the new data. Should go to zero sometime in Q1, it’s been long overdue. https://fred.stlouisfed.org/series/RRPONTSYD
How we’ll know if Trump is going to sell America out to ChinaKeep an eye on the export controls. They are the key.https://www.noahpinion.blog/p/how-well-know-if-trump-is-going-to
Just a messenger, the shitshow continues the dog team to bring emigrants to perform tasks that Americans can’t do another team to remove emigrants that perform jobs Americans don’t want to do the irony.
This is what happens when you let the speculators and FIRE economy rule.. eventually even the productives realize it is easier to make money on speculation than work. This is how banana republics function
Americans are too dumb for the white collar jobs, and want too much money. We’ll bring in Vivek’s cousins for that work, to drive up profits. Stupid Americans can take the jobs left behind by the deportees.
I was
afraid that was going to be your response president muskrat.
On Dec 20th, RRPOs dipped to a very low $98B, but in 8 short days, they’ve shot up 2.5x to $268B. That’s crazy! I I’m not an expert on RRPOs interest paid by the Fed vs bank reserves, but some sort of funny business just happened, when they raised rates.
The Fed has officially gone full retard / Modern Monetary Theory since 2008.
With the ultra-low mortgage rates millions of Americans are locked in at with much higher for longer, there’s no way in hell MBS is going anywhere near zero before the next recession hits. So, if QT grinds to a stop, what potential impact will that have on inflation, since the money supply will stop shrinking?
It’s quite obvious that the Fed’s balance sheet has it treading water. The Fed exists to protect the wealthy.
It’s because of the end of the year– banks get trash off their balance sheet for a few days and then take it back after.
Why the crowd on this blog are not talking about musk thoughts about the Americans aren’t qualified to do anything.
They simply cannot face the reality of what I’m telling you lake.
Leftist indoctrination does not produce education. In a new interview, Andreessen was talking about how certain companies have already dropped their DEI programs. Nothing substitutes for meritocracy.
What are you talking about? Can you not read? Typical dumb American.
Banks are waiting until Jan 20th to go hog wild.
Going out on a limb here but I do have some insider info. Trump won’t finish his term and we will get JD Vance as president.
Regarding this post I think we do get a recession in 2025 due to sheer stall speed when fiscal policy is uncertain. The US operates more like a banana Republic now and this instability is not good for anyone.
The “FUNNY BUSINESS” now has become “BUSINESS AS USUAL.”
We are smelling rats all over the ship now whereas before, the stink was cornered.
My guess is your prediction will be about as accurate as the one about Biden not serving his full term and Kamala being installed via the 25th. I.e., not going to happen. Listen to fewer idiots online is my advice.
Vance belongs to Peter Thiel. Do you want to see the first gay president?
News that top US intelligence officials in 2021 suppressed research pointing to a Chinese lab leak as COVID’s origin raises two key questions: Exactly who, and why?
That is, who made the call to keep Defense Department and FBI input out of the August 2021 briefing to President Biden on the issue, and out of the resulting official federal finding that COVID most likely arose naturally?
And, indeed, to also block Sen. Charles Grassley’s requests for the Defense research?
We know that Dr. Anthony Fauci and his public-health cronies had fought from the start to discredit all lab-leak talk.
Their motive is obvious enough: Since they’d funded related (at least) research at that Wuhan lab, they feared a backlash — against them personally, and/or against such research and its funding.
But why would the US intelligence community cover for Beijing, which would clearly bear the chief blame for cooking up a plague and then unleashing it on an unsuspecting world?
The most likely explanation is that someone decided that the rest of the world would also blame the US government as a whole, maybe even more than it did China’s rulers — so it was best to cover the whole thing up.
https://nypost.com/2024/12/27/opinion/who-decided-the-us-intelligence-community-would-suppress-key-covid-origin-research/
They were covering up the ACTUALITY that there was NO PANDEMIC and the numbers showed this back then. The whole point of the exercise was to KILL PEOPLE with Gates’s Dad the forefather (look it up).
More than doubling total assets from Dec’19 to Apr’22, and then slowly reducing it by 23% still leaves a hell of a lot of ex nihilo $s floating around. Additionally, the currency component of the Monetary base continued to trickle upward after Apr’22. M2 is up almost 4% y-o-y. I suspect this “QT” wouldn’t seem like that much of a tightening were the whole world not so afflicted with debts that cannot be paid off.
Watching trillions of fiat inflation being vaporized POOF! makes me SMILE.
Court Authorizes Service of John Doe Summons for IRS to Seek Identities of U.S. Taxpayers Who Participated in the “Gig Economy” Via a Digital Platformhttps://www.justice.gov/opa/pr/court-authorizes-service-john-doe-summons-irs-seek-identities-us-taxpayers-who-participated
That’s right… these little thieves made off with hundreds, maybe thousands of dollars that rightfully belongs to me!
The great drama of American shale production may now be nearing its final act. For years, we have anticipated that the relentless growth in shale output would crest by late 2024 or early 2025, catching many off-guard. In hindsight, even this expectation might have erred on the side of caution. Quietly and without much fanfare, both shale oil and shale gas appear to have passed their zenith several months ago.
Recent data from the Energy Information Agency (EIA) reveal that shale crude oil production reached its high-water mark in November 2023, only to slide 2%— roughly 200,000 barrels per day—since then. Likewise, shale dry gas production peaked that same month and has since slipped by 1% or 1 billion cubic feet per day. The trajectory from here, according to our models, looks steeper still.
“After all, President-elect Trump’s “Three Arrows” energy plan prominently
promises a 3-million-barrel-per-day increase in US oil-equivalent production.
But we see this optimism as misplaced. The primary forces behind the current
downturn are neither policy-related nor purely economic—they are geological and
inexorable. Depletion, not market dynamics or regulatory overreach, is the central
culprit.”
“Prices soared from $3.18 per barrel in 1973 to $34 per barrel by 1981. Producers,
true to their promises, responded with vigor. The rig count climbed from 993 in
1973 to a staggering 4,500 by late 1981. Yet despite this unprecedented surge in
drilling activity, U.S. oil production steadily declined throughout the 1970s.
By the end of 1981, production had fallen to 8.5 million barrels per day—far below the peak achieved a decade earlier and lower than when Nixon announced his ambitious goals.”
https://blog.gorozen.com/blog/the-depletion-paradox
The Fed’s QT plan is like my diet plan. It starts next week. It always starts next week.
Just one thing need to be remembered: when the sky is falling (due to incompetent monetary policies), there is no limit to the amount of printing.
When doing QT, small baby steps mostly forward.
Put a nice face to it, and ah.. those glasses look so smart and cool.
The bond market made the FED look foolish. After 2 interest rate cuts, yields on the 10 year US bond reversed direction and are challenging the 2024 highs.
3.62% on 9/16/24, ~4.6% now, 5.0% soon. Whence from there?
The FOMC “projected a scenario of higher inflation by the end of 2025” in their Dec. meeting.
They must have been previously reading me.
Contrary to Nobel Prize–winning economists Milton Friedman and Anna J. Schwartz’s “ A Monetary History of the United States, 1867–1960 “ monetary lags are not “long and variable”. No, the distributed lag effects for both real output and inflation have been mathematical constants for over 100 years
The 2-year rate-of-change in money flows, the volume and velocity of means-of-payment money, the proxy for inflation, rises in 2025 (after bottoming in August).
Inflationary depression. Well said
You’re such a loyal little toady. Come here and bounce on my knee.