For the week ended August 17 the balance sheet showed a decline of $29.376 billion which would be great, except:
As seen in table 5, the second-largest asset decrease was the $15.606 billion reduction in other assets (accrued interest due the Fed and other receivables):
5. Consolidated Statement of Condition of All Federal Reserve Banks
Millions of dollars
|
Assets, liabilities, and capital |
Eliminations from consolidation |
Wednesday |
Change since |
|
|
Wednesday |
Wednesday |
|||
|
Aug 10, 2022 |
Aug 18, 2021 |
|||
|
Assets |
|
|
|
|
|
Gold certificate account |
|
11,037 |
0 |
0 |
|
Special drawing rights certificate account |
|
5,200 |
0 |
0 |
|
Coin |
|
1,300 |
+ 5 |
+ 61 |
|
Securities, unamortized premiums and discounts, repurchase agreements, and loans |
|
8,749,703 |
- 13,177 |
+ 537,511 |
|
Securities held outright1 |
|
8,428,995 |
- 11,492 |
+ 637,359 |
|
U.S. Treasury securities |
|
5,699,175 |
- 21,397 |
+ 375,524 |
|
Bills2 |
|
326,044 |
0 |
0 |
|
Notes and bonds, nominal2 |
|
4,901,267 |
- 22,849 |
+ 316,825 |
|
Notes and bonds, inflation-indexed2 |
|
374,719 |
0 |
+ 21,375 |
|
Inflation compensation3 |
|
97,145 |
+ 1,453 |
+ 37,324 |
|
Federal agency debt securities2 |
|
2,347 |
0 |
0 |
|
Mortgage-backed securities4 |
|
2,727,473 |
+ 9,905 |
+ 261,835 |
|
Unamortized premiums on securities held outright5 |
|
329,026 |
- 574 |
- 25,914 |
|
Unamortized discounts on securities held outright5 |
|
-26,492 |
- 530 |
- 11,301 |
|
Repurchase agreements6 |
|
0 |
0 |
0 |
|
Loans7 |
|
18,174 |
- 581 |
- 62,634 |
|
Net portfolio holdings of Corporate Credit Facilities LLC8 |
|
0 |
0 |
- 17,116 |
|
Net portfolio holdings of MS Facilities LLC (Main Street Lending Program)8 |
|
25,902 |
- 252 |
- 4,632 |
|
Net portfolio holdings of Municipal Liquidity Facility LLC8 |
|
5,552 |
+ 1 |
- 4,214 |
|
Net portfolio holdings of TALF II LLC8 |
|
2,159 |
+ 1 |
- 2,354 |
|
Items in process of collection |
(0) |
49 |
- 15 |
- 21 |
|
Bank premises |
|
612 |
+ 5 |
- 1,051 |
|
Central bank liquidity swaps9 |
|
189 |
- 2 |
- 299 |
|
Foreign currency denominated assets10 |
|
17,831 |
- 334 |
- 3,297 |
|
Other assets11 |
|
30,230 |
- 15,606 |
+ 2,578 |
|
|
|
|
|
|
|
Total assets |
(0) |
8,849,762 |
- 29,376 |
+ 507,164 |
Note: Components may not sum to totals because of rounding. Footnotes appear at the end of the table.
That is the decline and ending balance reflected in the graph from the St.Louis Fed's FRED database:
HOWEVER....
Looking at the two largest and most important line items in table 1 of the H.4.1 release, Treasury paper and the Agency (Fannie, Freddie) MBS':
1. Factors Affecting Reserve Balances of Depository Institutions
Millions of dollars
|
Reserve Bank credit, related items, and |
Averages of daily figures |
Wednesday |
||
|
Week ended |
Change from week ended |
|||
|
Aug 10, 2022 |
Aug 18, 2021 |
|||
|
Reserve Bank credit |
8,837,056 |
- 4,356 |
+ 538,934 |
8,814,179 |
|
Securities held outright1 |
8,441,593 |
+ 1,649 |
+ 666,083 |
8,428,995 |
|
U.S. Treasury securities |
5,711,698 |
- 8,340 |
+ 397,848 |
5,699,175 |
|
Bills2 |
326,044 |
0 |
0 |
326,044 |
|
Notes and bonds, nominal2 |
4,914,324 |
- 9,792 |
+ 337,969 |
4,901,267 |
|
Notes and bonds, inflation-indexed2 |
374,719 |
0 |
+ 22,691 |
374,719 |
|
Inflation compensation3 |
96,612 |
+ 1,453 |
+ 37,189 |
97,145 |
|
Federal agency debt securities2 |
2,347 |
0 |
0 |
2,347 |
|
Mortgage-backed securities4 |
2,727,548 |
+ 9,990 |
+ 268,235 |
2,727,473 |
....MUCH MORE
We see the nice, not huge, in fact just slightly above the idealized $1.00 billion per day ($7.0 bil. weekly) decline in Treasury paper stated as the Fed's target in the May 4 press release.
BUT that entire reduction was more than offset by the $9.990 increase in MBS assets.
We've mentioned this is where a huge problem lurks in a few prior looks at the balance sheet:
and will get into what this means next week but for now, a repost of August 12's "Fed Purchases Of Mortgage Backed Securities Have Destroyed The Housing Market"June 27 Fed Balance Sheet: Not Seeing The Reduction In Fannie/Freddie Mortgage-Backed Securities
We deliberately waited for three weeks after the start of the program to allow for settlement issues in the Agency MBS portion of the portfolio.
Where this gets really interesting is in five weeks the plan is to increase the QT to $95 billion per month.Earlier we mentioned we didn't much care how this jobs report came out and after seeing the Nasdaq 100 futures down 1.6% in late pre-market trade it is now down .99%, big whoop.However, for the first time since QT was supposed to start on June 1, we saw some serious declines in both Treasury holdings and, I suspect more importantly, Agency MBS.First up, the largest (by far) line items in the H.4.1 report:...
And severely eroded any claim the Fed has to independence as well.
But that's a topic for another post or three.
From Bloomberg, August 11:
The Fed’s Damage to the Housing Market May Last Years
The central bank created major distortions in a market where many Americans have most of their wealth. Why? With interest rates now hovering around 5%, existing-home sales are down more than 14% from last year. Some potential buyers are sitting on the sidelines until rates or prices or both decline, while sellers are hoping the market picks up again so they can get a higher price.
But don’t count on rates falling to those pandemic lows. They were the result of extraordinary market manipulation from the Fed. And unless this becomes a regular feature of monetary policy, rates are not going back to what they used to be.
The real estate market has been on a wild ride. House prices, measured by the Case-Schiller index, increased 30% between March 2020 and December 2021, a steeper rise than the lead-up to end the housing bubble in 2008. This was in part because many people moved during the pandemic, but also because the 30-year mortgage rate was only 2.65% in spring of 2021.
The impact of the Fed’s interference may be felt for years. In the spring of 2020, the Fed was desperate to avoid economic collapse, so it reverted to its 2008 playbook. It cut rates to zero and brought back quantitative easing, buying long-dated government bonds and mortgage-backed securities (MBS). Most residential mortgages are securitized by Fannie Mae or Freddie Mac, and resold in what is known as an agency MBS.In 2020, the mortgage-backed security market was in trouble, and the Fed was even more aggressive than it was in 2008. It effectively became the only ultimate buyer of these securities: Its holdings of agency MBS increased by $1.3 trillion between 2020 and 2022, while the market for agency mortgage-backed securities grew by $1.5 trillion. The Federal Reserve now holds more than 40% of the total outstanding amount of agency MBS, or nearly half the market.
These actions were one big reason rates fell so low. Your mortgage rate is based on the 10-year bond rate, plus a premium for the extra risk involved. The size of that risk premium is largely determined in the MBS market, based on the liquidity and rate risk the investor takes on. The figure below shows the Bloomberg US MBS index minus the yield on 10-year bonds....*****The spread spiked at the start of the pandemic, but then as the Fed kept buying it fell to nearly zero, and the housing market raged. The spread started rising again in June once the end of QE was in sight, and it rose further when the Fed started to taper its purchases in the fall of 2021 before stopping in early 2022. The spread is now higher than it was before the pandemic.Buying mortgage-backed securities may have made sense in spring 2020, but why the Fed did not start tapering for 18 months, even as the housing market was clearly overheating, was never explained....
....MUCH MORE, she gets it.
And again, if interested:
Ahead of Tomorrow's Personal Consumption Expenditures Inflation Report, A Reminder
