Implosion Stocks Bricks & Mortars California Daydreams Canada Cars & Trucks Commercial Real Estate Companies & Markets Consumer Credit Bubble Cryptocurrency Energy Fed Housing Bubble Europe 2 Inflation & Devaluation Japan Jobs
According to the weekly balance sheet released today, the Fed has lost $532 billion in assets since its peak in April, bringing total assets to $8.43 trillion, the lowest since September 2021. Compared to the balance sheet a month earlier (released January 5), total assets decreased by $74 billion.
Since peaking in early June, the Fed’s holdings of U.S. Treasuries have fallen $374 billion to $5.34 trillion, the lowest level since September 2021. Over the past month, the Fed’s holdings in US Treasuries have fallen $60.4 billion, just above the $60 billion ceiling.
Treasury bills and bonds are written off the balance sheet in the middle and at the end of the month, when the Fed receives their face value. The monthly rollback limit is $60 billion.
Since the peak, the Fed has cut $115 billion of its holdings in MBS, including $17 billion in the last month, bringing the overall balance sheet down to $2.62 trillion.
The total amount of MBS taken off the balance sheet each month since QT’s inception has been well below the $35 billion ceiling.
MBS disappear from the balance sheet primarily as a function of the pass-through principal payments that all holders receive when paying off a mortgage, such as refinancing a mortgage or selling a mortgaged home, along with regular mortgage payments.
As mortgage rates soared from 3% to more than 6%, people are still paying mortgages, but mortgage refinances have plummeted, home sales have plummeted, and the flow of pass-through principal payments has disappeared.
The transfer of principal payments reduces the MBS balance, as shown by the downward zigzag in the chart below.
The upward curve on the chart started when the Fed was still buying MBS, but in mid-September this dirty practice was completely stopped and the upward curve on the chart disappeared.
We are still awaiting any indication from the Fed that it is seriously considering selling MBS outright to bring the monthly rollover limit to $35 billion. At the current rate, he would have to sell between $15 billion and $20 billion a month to reach the cap. Several Fed governors have mentioned that the Fed may eventually move in that direction.
Note in the chart above that in 2019 and 2020, MBS went off balance at an above-the-ceiling rate as mortgage rates fell, leading to a surge in refinancing and home sales. QT-1 ended in July 2019 but MBS continued to decline until February 2020 when the Fed replaced it with US Treasuries and its balance sheet began to rise again in August 2019 as shown in the chart above.
The Fed has said repeatedly that it does not want to have MBS on its balance sheet, partly because cash flows are so unpredictable and uneven that it complicates monetary policy, and partly because having MBS would distort the private sector Debt (housing debt) higher than other types of private sector debt. That’s why we may soon see some serious talk about the direct sale of MBS.
Unamortised premiums fell $3 billion for the month, dropping $45 billion from a peak in November 2021 to $311 billion.
What is this? For securities purchased by the Federal Reserve in the secondary market, when the market yield is below the coupon rate of the securities, the Federal Reserve, like everyone else, must pay a “premium” in excess of face value. But when the bonds mature, the Fed, like everyone else, gets paid at face value. In other words, in exchange for higher-than-market coupon payments, there will be a capital loss on the premium amount when the bond matures.
Instead of recording a capital loss when the bond matures, the Fed amortizes the premium in small increments each week over the life of the bond. The Fed keeps the remaining premium in a separate account.
Central bank liquidity swaps. The Fed has long had swap lines with other major central banks where the central banks can exchange their currency with the Fed for dollars via swaps maturing over a set period of time (say 7 days), after which the Fed gets their money back. dollars, and another central bank withdraws its currency. There are currently $427 million in outstanding swaps (with the letter M):
“Basic loan” – Discount window. After yesterday’s rate hike, the Fed charged banks 4.75% per annum for lending in the “discount window”. So it’s expensive money for the bank. If they can attract savers, they can borrow money cheaper. So the need to borrow in the discount window at such high rates is bewildering.
Primary credit began to rise about a year ago, reaching $10 billion by the end of November 2021, which is still low. In mid-January, the Federal Reserve Bank of New York published a blog post titled “Recent Growth in Discount Lending.” He did not name them, but suggested that most of the smaller banks were approaching the discount window and that quantitative tightening may have temporarily reduced their liquidity positions.
But borrowing in the discount window has declined since November and stands at $4.7 billion today. Just follow it:
The Fed’s huge holdings of securities are often a money-making machine. They still exist, but last year it started paying higher interest — as it started raising rates — on cash that banks deposited with the Fed (“reserves”) and mostly Treasury money market funds through overnight reverse repurchase agreements ( RRP). Since September, the Fed has started paying more interest on reserves and RRP than on its own securities.
The Fed lost $18.8 billion from September to December 31, but gained $78 billion from January to August, so it still gained $58.4 billion for the full year. Last month, he revealed that he transferred $78 billion in revenue to the US Treasury in August, a requirement from the Federal Reserve.
These remittances started making losses in September and were stopped. The Fed tracks these losses on a weekly basis in an account called Transfers of Revenue to the US Treasury.
But don’t worry. The Federal Reserve creates its own money, it never runs out of money, it never goes bankrupt, and what to do with those losses is a matter of accounting. This can be circumvented by treating the loss as a deferred asset and placing it in the liability account “Transfer of income payable to the US Treasury”.
Because the liability account losses were squared, the total capital account remained unchanged at about $41 billion. In other words, losses do not drain the Fed’s capital.
Love to read WOLF STREET and want to support it? You can donate. I am thankful. Click Beer & Iced Tea Mugs to learn how:
So, about $3.5 trillion. Actually, I don’t mean to sound sarcastic or cynical. They exceeded my modest expectations a year ago.
More broadly, does the total “assets” chart really imply anything resembling power or control over the US economy or events?
Creating inflation (the ratio of “money” to real assets) to “recover” earlier (and successive) disasters is not a trend of success, but a pathological record.
Your expectations are low. As the stock market recovers most of its losses and becomes a huge bubble again, you would think they would want to cut their balance sheets faster, but I think the problem here is that they can’t dump their balances without taking a loss. table loss. Therefore, the Fed must first curb inflation and lower interest rates, and then liquidate the balance sheet at a faster pace.
My theory is that the Fed is willing to raise rates to curb inflation because it hurts the real economy, but it is unwilling to sell assets because it will take away market support, which hurts all their rich friends in their pockets. After all, the Fed is just a bunch of bankers. They don’t care about anyone but themselves.
I disagree with your theory, at least in its more convincing form, but it presents an interesting puzzle. Just like in a casino, the casino must allow the player to receive some value. The house has the opportunity to take all the value, but the game is over. To me, the Fed is not as ruthlessly selfish as a bunch of bankers. Like no one who is not in the club, I have benefited greatly from this system of credit and money, despite decades and situations.
Quantitative tightening (QT) of MBS is so slow that it allows indirect stimulus as funds holding MBS can provide free mortgages or outright purchases.
This is not “indirect stimulation”. It just drags on slower. But it still drags on.
Everyone seems to be looking for an excuse to lose money in a bear market. Now is the time to re-read Memoirs of a Stock Manipulator under the pseudonym of Edwin Lefevre, who is actually Jesse Livermore, a speculator. Nothing changed. The stock market is exactly the same.
Now I see a pile of gold coins, a shovel and a van with “Harry Houndstooth Hauling Company” written on the side.
Recklessly short the market. This is the rebound we’ve been waiting for and it’s time to step on the gas.
SQQQ peaked, SRTY peaked, and SPXU and SDOW finally realized (as Wile E. Coyote fell off a cliff) that there was a big fall ahead of us.
Algorithmic trading has become very complex, with the ability to track long and short stops. They use trailing sells and buys that happen at the speed of light to determine where they can take the market, causing the most pain to the average investor. For example, stop loss on the shortest stocks of bankrupt companies, running every moving average, Fibonacci, volume weighted average, etc. The people who own these algorithmic trading operations are an elite group and there is a possibility of monopoly and collusion of most of the stock market. This is one of the reasons why the bear market will last for a long time. The Fed sucks. the reserve does not have access to some kind of reliable software that takes into account all economic variables (as above) to calculate numbers for various inputs/time periods in order to achieve their targets – say 2% inflation. Algorithms can crash after a year trying understand how to do it
There is no long or short position. Hold the gold position but sell too early on December 28, 2022. If I had been short, I would have posted this as a warning to short sellers.
I expect the US CPI to be slightly higher in January than in December. In Canada, the CPI was much higher in January than in December. Since the CPI numbers are rising month by month, I would have had large short positions in early January or I would have been killed.
I completely agree. love this book. After selling all Tesla options in December, I even bought a few Tesla options in anticipation of a rally. Now buy the September/January puts again – Nvidia, Apple, Msft, etc. Let’s hope the next phase is sharper and longer like other bear markets.
“I sold everything I could. Then the shares went up again, to a fairly high level. It cleared me. I was right and wrong.
By the way, Edwin Lefebvre is a real writer and columnist. He interviewed Jesse Livermore and wrote this book based on that interview. Livermore also has a book he wrote himself, but I can’t remember the title now. He is certainly not a professional writer, and it shows.
I’ve heard some talk, including from Lacey Hunt, that seems to suggest that this is probably the case.
I do not want it. Banks are currently trying to attract more deposits and expand their offerings, especially by selling brokerage certificates to new customers instead of offering higher rates to existing customers (who still pay loyalty tax). The banks have had plenty of time to ramp up this type of wholesale funding, and they are doing so. When I look at a brokerage CD for a product, I see it in my brokerage account with an interest rate of 4.5% to 5%. Banks are now scrambling for deposits. There is a lot of money in money market funds, and if banks offer higher rates, they will force some of the cash to move from money market funds to CDs and savings accounts. Banks don’t want to do this because it increases their cost of funding and puts pressure on their margins, but they do it.
“We are still awaiting any indication from the Fed that it is seriously considering an outright sale of MBS to increase the rollover to $35 billion per month. At the current rate, it will have to sell between $15 billion and $20 billion a month. several Fed governors have mentioned that the Fed may eventually move in that direction.”
As much as I despise Pow Pow, I’ll give it credit if they can get it started. We hope that this will indeed have an impact on the decline in house prices and accelerate the current pace of price decline. The question is why did they wait so long to start? Couldn’t the Fed start selling MBS, maybe in smaller quantities, at the same time QT starts? I know they let it run its course, but if they really don’t like having MBS in their books, you might think promoting + selling at the same time would be the best solution.
Phoenix_Ikki, it’s hard for me to know how much MBS the Fed had before 2006-2009. Does the Fed have any assets? If the Fed never had MBS in the past and the mortgage market boomed, why is the Fed’s sale of its MBS now having a detrimental effect on mortgage rates and the housing market?
They prefer housing debt to debt that is not mandated. They also bought corporate/junk bonds, albeit in small quantities, which also fell outside the scope of the mandate. It’s also not a “suspension of mkt to mkt accounting standards.”
Post time: Feb-28-2023