Quantitative Tightening shed 43% of the assets the Fed had added during pandemic QE. Bank-panic facility BTFP is vanishing.
By Wolf Richter for WOLF STREET.
Total assets on the Fed’s balance sheet dropped by $98 billion in November, to $6.896 trillion, the lowest since May 2020, according to the Fed’s weekly balance sheet today.
One of the big drivers of the $98 billion drop in November was the bank panic facility BTFP, cobbled together over the weekend in March 2023 to deal with the fallout from the SVB collapse. It dropped by $39 billion in November, is down by 77% from the peak, and will be zero no later than March 11, 2025.
And another QT milestone: Since the end of QE in April 2022, the Fed has shed $2.07 trillion in assets. It amounts to 23% of its holdings at the time. In terms of the assets piled on during pandemic QE, the Fed has now shed 43% of them.
QT assets by category.
Treasury securities: -$24 billion in November, -$1.46 trillion from peak in June 2022, or -25%, to $4.32 trillion, the lowest since August 2020.
In terms of the $3.27 trillion pile of Treasuries added during pandemic QE, the Fed has now shed 45% of them.
Treasury notes (2- to 10-year) and Treasury bonds (20- & 30-year) “roll off” the balance sheet mid-month and at the end of the month when they mature and the Fed gets paid face value. Since June, the roll-off has been capped at $25 billion per month. About that much rolled off in November, minus the amount of inflation protection the Fed earns on its Treasury Inflation Protected Securities (TIPS) that was added to the principal of the TIPS.
Mortgage-Backed Securities (MBS): -$17 billion in November, -$491 billion from the peak, to $2.25 trillion, the lowest since June 2021. The Fed has shed 36% of the MBS it had added during pandemic QE.
MBS come off the balance sheet primarily via pass-through principal payments that holders receive when mortgages are paid off (mortgaged homes are sold, mortgages are refinanced) and when mortgage payments are made. But sales of existing homes have plunged to the lowest since 1995, and mortgage refinancing has collapsed. So fewer mortgages got paid off, and passthrough principal payments to MBS holders, such as the Fed, have been reduced to a trickle. As a result, MBS have come off the balance sheet at a pace that has been below $20 billion in most months.
There has been some discussion at the Fed, including in October by Dallas Fed President Lorie Logan, about outright selling MBS to speed up the process of getting rid of them, and getting rid of all of the MBS even after QT ends, and replacing them with Treasury securities.
The Fed only holds “agency” MBS that are guaranteed by the government, and is therefore not exposed to credit risk if borrowers default on mortgages.
Bank liquidity facilities.
The only two bank liquidity facilities that currently have a balance that’s above zero or near-zero are the Discount Window and the Bank Term Funding Program (BTFP). The other bank liquidity facilities that were heavily used after the SVB collapse are either at zero or near zero:
- Central Bank Liquidity Swaps ($101 million)
- Repos ($7 million)
- Loans to the FDIC ($0).
Bank Term Funding Program (BTFP): -$39 billion in November, to $17 billion, down 77% from the peak ($168 billion).
The BTFP had a fatal flaw when it was conceived in March 2023 after SVB had failed: Its rate was based on a market rate. When Rate-Cut Mania kicked off in November 2023, market rates plunged even as the Fed’s policy rates were unchanged, including the 5.4% the Fed paid banks on reserves. Some banks then used the BTFP for arbitrage profits, borrowing at the BTFP at a lower market rate and leaving the cash in their reserve account at the Fed to earn 5.4%. This arbitrage caused the BTFP balances to spike to $168 billion.
The Fed shut down the arbitrage in January by changing the rate and decided to let the BTFP expire on March 11, 2024. Loans that were taken out before that date can still be carried for a year from when they were taken out. So, no later than March 11, 2025, the BTFP will be zero, removing another $17 billion from the Fed’s balance sheet by then.
Discount Window: +$830 million in November, to $2.4 billion. During the bank panic in March 2023, loans had spiked to $153 billion.
The Discount Window is the Fed’s classic liquidity supply to banks. As of the rate cut on November 7, the Fed charges banks 4.75% in interest on these loans and demands collateral at market value, which is expensive money for banks.
In his battle to remove the stigma attached to borrowing at the Discount Window, Powell has been exhorting banks to use this facility more often, and practice using it with small-value exercise transactions, and to even get set up to use it, and to pre-position collateral so that they can use it when they need to. It’s a bit “clunky” to use, according to Powell.
What else caused total assets on the balance sheet to drop?
The balance sheet declined in total by $98 billion in November. Above, we accounted for about $80 billion:
- Treasury securities: -$24.4 billion
- MBS: -$17 billion
- BTFP: -$39 billion
- Discount Window: +$830 million
And another $16.2 billion came off the balance sheet in November in these two accounts:
“Other assets”: $14.6 billion, mostly accrued interest on its bond holdings that the Fed had set up as a receivable, and that it got paid in November. When it gets paid interest, it destroys that money (the Fed doesn’t have a “cash” account, like companies do; it creates money when it pays for something and destroys money when it gets paid, such as when it gets paid interest).
“Unamortized premiums”: $2.2 billion. This is the amount the Fed writes off every month to account for the premium over face value it had to pay for bonds during QE that had been issued with higher coupon interest rates earlier and that had gained value as yields dropped before the Fed bought them. Like all institutional bondholders, the Fed amortize that premium over the life of the bond. The remaining balance of unamortized premiums is now down to $252 billion, from $356 billion at the peak in November 2021:
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