What the Fed did in details and graphs.
by Wolf Richter for Wolf Street.
The Federal Reserve (QT) quantitative tightening ended the second month of the three-month period. Total assets in the Federal Reserve weekly balance sheet As of August 3, released this afternoon, it is down $17 billion from the previous week, and down $91 billion from its peak in April, to $8.87 trillion, the lowest level since February 2.
Quantitative easing created the money that the Federal Reserve pumped into financial markets via its primary dealers, and from there began trading assets and chasing assets, including non-financial markets such as housing and commercial real estate. The purpose and effect was to curb returns and create inflation in asset prices. Finally, it also helped create severe consumer price inflation.
QT does the opposite: it destroys money and has all the opposite effects – not for day traders but in the long run. QT is one of the tools the Fed is using to quell the now rampant consumer price inflation.
Treasury bonds: – $52 billion from peak.
July: – $30 billion + $4.6 billion in TIPS.
Treasuries and Bonds come out in the middle of the month and at the end of the month, when they mature. Today’s balance sheet includes the rollover at the end of July.
Treasury Inflation Protected Securities (TIPS) pay the inflation compensation that is added to the base value of the TIPS. On maturity of TIPS, holders receive the original face value plus the cumulative inflation compensation that was added to the share capital.
The Federal Reserve currently holds $374 billion in TIPS. Inflation compensation is about $1 billion to $1.5 billion per budget week, or about $4 billion to $5 billion per calendar month, which Add to the balance of treasury bonds.
QT’s plan for gradual introduction (June through August) calls for the Federal Reserve to allow $30 billion of Treasury securities to trade in each calendar month, as they mature. And the Fed did just that in July.
So why did Treasuries drop by only $25.2 billion, not $30 billion? Inflation compensation tips!
- The Fed allowed $30 billion in Treasuries to be rolled out without replacement, which drop The balance is $30 billion.
- The Federal Reserve received from the government $4.6 billion in compensation for inflation, which a plus Balance of $4.6 billion
- Net effect: Gross balance decreased by $25.2 billion.
Inflation compensation is added to the treasury bond balance All The week is the reason that the reduction in the balance will be less each month than the actual turnover.
In the chart below, note the steady increase of about $1-1.5 billion per week after the end of quantitative easing from mid-March through June 6, which is the inflation offset from TIPS.
Treasuries are now down $52 billion from their June 6 peak to $5.72 trillion, the lowest since Jan. 26:
Mohammed bin Salman strange creatures with great delay.
How can Mohammed bin Salman be taken out of the balance sheet:
- Pass-through capital payments – the basic method
- When “call” MBS exporters
- When Mohammed bin Salman matures, but they are usually “called” before they are mature
- When the Fed sells it, which he said he might do one day in the future.
Passing capital paymentsWhen the principal mortgages are paid off (due to the sale or refinance of the property) or when regular mortgage payments are made, the mortgage server (the company to which you send the mortgage payments) sends the principal payments to the entity that securitized the mortgages to MBS (such as Fannie Mae), which then sends these principal payments to MBS holders (such as the Federal Reserve).
The book value of Mohammed bin Salman shrinks with each passing major payment. This reduces the amount of MBS on the Federal Reserve’s balance sheet. These basic pass-through payments are variable and unpredictable.
The source “calls” MBS. After a large number of years of major payments passing, the residual book value of MBS may have fallen so much that it is no longer worth the service of MBS, and the issuer, like Fannie Mae, decides to “call” MBS to regroup the remainder of MBS Mortgage debt in the new Mohammed bin Salman with other mortgages. When Fannie Mae “calls out” Mohammed bin Salman, they are taken off the Federal Reserve’s balance sheet.
When Mohammed bin Salman matures. MBS has maturities of 15 years or 30 years. But this is largely irrelevant because the average lifespan of mortgages in the United States is less than 10 years because they are paid off due to sale or refinancing. When the remaining book value of MBS falls below a certain level, the issuer calls them and takes them off the books.
How does Mohammed bin Salman enter the balance sheet.
The Fed bought MBS in the “to be announced” (TBA) market during the period of quantitative easing, to a lesser extent during the Taper, and to a lesser extent in June and July. The June and July purchases are designed to replace the pass-through principal payments for June and July that exceeded the $17.5 billion monthly cap.
But purchases in the TBA market take one to three months to settle. The Federal Reserve holds its positions after a settlement.
So the flow of MBS on the balance sheet over the past few weeks is caused by deals that were executed a few months ago, before QT. What we’re seeing now are purchases made during Taper.
These purchases are not in line with the basic pass-through payments received by the Federal Reserve. This imbalance, a lag of three months, causes ups and downs in the MBS balance, which is also shown in the overall balance sheet.
Mohammed bin Salman: – $23 billion from peak to $2.72 trillion:
Unamortised premiums: continuous decline.
All buyers pay a “premium” to purchase a bond if the coupon rate for that bond exceeds the market yield at the time of purchase.
The Fed holds securities at face value in regular accounts and holds the “annuity” in a special account, the “unamortized annuity.” The Fed then amortizes the premium to zero over the remaining maturity of the bond, while simultaneously receiving the higher coupon interest payments. By the time the bond matures, the premium is fully depreciated, the Federal Reserve receives the face value, and the bond is taken off the balance sheet.
The “unamortised premiums” peaked with the onset of the taper in November 2021 at $356 billion, and have now fallen in a steady process by $26 billion to $330 billion:
Other assets of quantitative easing and rescue have largely disappeared.
- Special Purpose Vehicles (SPVs) in which the Fed has bought bonds, loans, and ETFs: $38 billion
- Central Bank liquidity swaps: $0.2 billion.
- Repurchase: $0
Money printing comes home to crouch:
In the fifteen years of this graph, there are three crises: the financial crisis, the pandemic, and now hyperinflation. Today’s inflation crisis pulls the opposite direction of the two previous crises, and dealing with it will require the application of tools in the opposite direction:
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