Fed Balance Sheet Drops by $42 Billion in May, Sheds MBS at Fastest Pace, Starts the Reverse of Operation Twist

Changes on the asset side of the Fed’s balance sheet – the $42-billion drop in May – also reflect the Fed’s other activities. But in terms of Treasuries and MBS, the Fed shed billion in May.

Let’s suppose the Fed had maintained a 5%/year growth path in nominal GDP. The FFR would not have declined to 0.25% but rather more likely be around 3%. They are paying a few billion dollars/year in interest on excess reserves to prevent the money they created to buy MBS.

At the time I wasn’t too fussed about the action as reducing a .4 trillion balance sheet by $10 billion a month didn’t seem all that important. But $10 billion is just a start. The Fed’s goal is to eventually reach $50 billion a month, with the program ending in 2020 having hopefully shrunk the balance sheet to $3 trillion.

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Total assets fell by $42 billion in May, as of the balance sheet for the week ended June 5, released this afternoon. This was the balance-sheet week that included May 31, the date when Treasuries rolled off. This drop reduced the assets to $3,848 billion, the lowest since October 2013.

Fed Balance Sheet Drops by $42 Billion in May, Sheds MBS at Fastest Pace, Starts the Reverse of Operation Twist 06-07 wolfstreet.com May was the first month of the Fed’s new plan of slowing QT and altering it in other ways.

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This drop reduced the assets to $3,848 billion, the lowest since October 2013. Since the beginning of the "balance sheet normalization" process, the Fed has shed $613 billion. Since peak-QE in January 2015, the Fed has shed $669 billion: In May, the balance of MBS fell by $20 billion to $1,555 billion.

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