⚠️CHART OF THE WEEK: The Fed continues to reduce its balance sheet (QT)

Let's clarify some misconceptions about the Fed balance sheet, which has been flying on the X platform over the last few days

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The amount of assets held by the Fed on its balance sheet dropped by $17 billion over the past month, to $6.7 trillion, the lowest since April 2020.

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Since April 2022, the central bank has reduced its portfolio of assets by $2.3 trillion, or 25%. This is ~48% of the $4.8 trillion the Fed purchased during the post-2020 Crisis response.

The Federal Reserve currently holds $4.2 trillion in Treasuries and $2.2 trillion in Mortgage-Backed Securities (MBS).

As a reminder, in March, the Fed announced it would slow the average pace of Quantitative Tightening (QT) from $60 billion per month to $40 billion. The central bank lowered the monthly cap (maximum amount) on Treasury securities allowed to mature without being reinvested to $5 billion from $25 billion. Mortgage-backed securities (MBS) runoff remained at the same monthly pace of up to $35 billion.

And here comes some confusion. Most recently, there have been some posts on X that the Fed has been running QE (Quantitative Easing) because it has been still buying Treasuries and MBS.

The truth is the Fed is indeed buying assets, but in the form of reinvestment. This means once the currently held assets mature and the central bank receives proceeds from them, it uses a portion to buy Treasuries and MBS to prevent reducing the Fed balance sheet too fast.

If the Fed aims at a monthly net asset reduction of up to $40 billion, then if $100 billion in assets mature in a particular month, it has to buy at least $60 billion to prevent breaching the cap.

In other words, the Fed is not running QE. It is still running QT (Quantitative Tightening). The balance sheet’s size continues to fall which means more Treasuries and MBS mature than the Fed buys. If this trend reverses, we will certainly know this.

More on the topic plus an explanation of different ways of conducting QT (Quantitative Tightening)::

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