The following analysis breaks down the Fed balance sheet in detail. It shows different parts of the balance sheet and how those amounts have changed. It also shows historical interest rate trends.
Breaking Down the Balance Sheet
In March, the Fed announced a further reduction in the balance sheet runoff from $25B a month to $5B a month. The data shows that they have been reducing the pace of runoff but have not yet gotten down to the target $5B a month. The reductions have fallen, but so have the additions.
Figure: 1 Monthly Change by Instrument
The table below provides more detail on the Fed’s QT efforts. As shown, the current size of the balance sheet is $6.6T which means it would take over 100 years to fully wind down their balance sheet at the new $5B pace.
Figure: 2 Balance Sheet Breakdown
The weekly activity can be seen below. As shown, it’s been mostly consistent with big chunks along the way. It is also allowing a range of maturities and products to roll off.
Figure: 3 Fed Balance Sheet Weekly Changes
The chart below shows the balance on detailed items in Loans and also Repos. These were the programs set up in the wake of the SVB collapse early last year. All of the programs have dropped down to zero at this point showing that the emergency measures have come to a close.
Figure: 4 Loan Details
Yields
Yields have been fluctuating within a band since Sept 2022, ranging mostly between 3.25% and 4.75%. The range of rates has begun to widen in recent months and the yield curve takes on a more normal shape.
Figure: 5 Interest Rates Across Maturities
This normalization of the yield curve can be seen in the chart below. The spread between the 2 year and 10 year continues to move up. This does not mean a recession is no longer likely because the inverted yield curve can work on a significant lag.
Figure: 6 Tracking Yield Curve Inversion
The chart below shows the current yield curve, the yield curve one month ago, and one year ago. The long end has moved up while the medium-term bonds have stayed pretty flat for a year. Once the Fed lowers rates in September, it will bring down the very short-term part of the curve.
Figure: 7 Tracking Yield Curve Inversion
The Fed Takes Losses
When the Fed makes money, it sends it back to the Treasury. This has netted the Treasury close to $100B a year. This can be seen below.
Figure: 8 Fed Payments to Treasury
You may notice in the chart above that 2023 and 2024 are showing $0. That’s because the Fed has been losing money. According to the Fed: The Federal Reserve Banks remit residual net earnings to the U.S. Treasury after providing for the costs of operations… Positive amounts represent the estimated weekly remittances due to U.S. Treasury. Negative amounts represent the cumulative deferred asset position … deferred asset is the amount of net earnings that the Federal Reserve Banks need to realize before remittances to the U.S. Treasury resume.
Basically, when the Fed makes money, it gives it to the Treasury. When it loses money, it keeps a negative balance by printing the difference. That negative balance has just exceeded $238B!
Figure: 9 Remittances or Negative Balance
Who Will Fill the Gap?
The Fed has not been buying in the Treasury market for over a year (they have been selling); however, the Treasury is still issuing tons of new debt. Who has been picking up the slack since the Fed stepped away?
International holdings have increased a decent amount over the last year by over $750B. Unfortunately, this pales in comparison to the amount of debt issued by the Treasury overall which is closer to $2T.
One thing to note is that the last 5 months have seen almost zero increase in international holdings. It has stayed completely flat. This is likely related to the current debt ceiling. No new issuance – no new buying.
Note: data is updated on a lag. The latest data is as of June
Figure: 10 International Holders
It should be noted that China continues to reduce holdings of US Treasuries. They have dropped $500B over the last decade, while Japan has been mostly flat over the same time. The slack has been picked up by other countries.
Figure: 11 Average Weekly Change in the Balance Sheet
Historical Perspective
The final plot below takes a larger view of the balance sheet. It is clear to see how the usage of the balance sheet has changed since the Global Financial Crisis.
Figure: 12 Historical Fed Balance Sheet
Conclusion
The Fed balance sheet has been very quiet for a few years. A steady, slow reduction. If Trump continues to exert pressure on the Fed, then it will likely see a reversal of the QT. This would mean new all-time highs in the Fed balance sheet will be coming in the future.
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