Quarterly Report on Federal Reserve Balance Sheet: Fed Diet Starts
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| From Federal Reserve |
Recently, the Federal Reserve released the March 2018 edition of the Quarterly Report on Federal Reserve Balance Sheet Developments a document that provides updates on the changes in assets and liabilities of the central bank and how they coexist with the changes in interest rate policy. With the FOMC announcing an interest rate increase at the first meeting led by the new chairman, Jerome Powell, some changes in open market operations are expected to be the result.
The February 28th, 2018 balance sheet was released at the end of March 28th and showed the result of the Federal Reserves first attempt at shrinking the balance sheet.
| Item | Change (in billions) | Percent |
|---|---|---|
| Total Assets | -$68 | -1.5% |
| U.S. Treasury securities | -$41 | -1.7% |
| mortgage-backed securities | -$11 | -0.6% |
The table above shows the two areas the Federal Reserve drew from (both included in the total asset draw). U.S. Treasuries were understandably the largest decrease on the asset side with an almost 2 percent decrease. Mortgage-backed securities were the second with a 0.6 percent decrease. To offset this on the liability side, the Federal Reserve increased their reductions in reverse repurchase agreements and term deposits held by depository institutions.
This process of normalization is accomplished by reducing the amount of reinvestment of payments on held securities.Officially, the reductions will occur at $6 billion of Treasury securities and $4 billion of agency debt and MBS a month. These thresholds will increase gradually until they reach $30 billion and $20 billion respectively. As less reinvestment occurs, the Federal Reserve will also release more of its reserve balances increasing the amount of money in the banking system. The central bank plans on lightening the load of reverse repo agreements to accomplish this.
None of these dynamics are too surprising as the Federal Reserve had long acknowledged the need to reduce the size of the Federal Reserve's balance sheet. However, there might be some criticism from President Trump if he deems rate raising unwanted. The Washington Post pointed out that he "has previously said he doesn't like it" in an article discussing a tweet that criticized China and Russia "devaluing" their currencies as "the U.S. keeps raising interest rates." Despite dovish protests, the Fed Chairman and the FOMC look to keep on their course even with volatility creeping into the market.
This process of normalization is accomplished by reducing the amount of reinvestment of payments on held securities.Officially, the reductions will occur at $6 billion of Treasury securities and $4 billion of agency debt and MBS a month. These thresholds will increase gradually until they reach $30 billion and $20 billion respectively. As less reinvestment occurs, the Federal Reserve will also release more of its reserve balances increasing the amount of money in the banking system. The central bank plans on lightening the load of reverse repo agreements to accomplish this.
None of these dynamics are too surprising as the Federal Reserve had long acknowledged the need to reduce the size of the Federal Reserve's balance sheet. However, there might be some criticism from President Trump if he deems rate raising unwanted. The Washington Post pointed out that he "has previously said he doesn't like it" in an article discussing a tweet that criticized China and Russia "devaluing" their currencies as "the U.S. keeps raising interest rates." Despite dovish protests, the Fed Chairman and the FOMC look to keep on their course even with volatility creeping into the market.
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