A Weekly Contraction in the Fed’s Balance Sheet and Ruminations on ‘The Plan’

Over recent months we’ve noticed that the public sector has been making attempts to ‘clean up’ its balance sheet (however half-hearted those attempts may have been). The Fed in particular has been engaged in increasing the degree to which the Federal Reserve note is ‘good for’ the pseudo-traditional central banking asset of the long-term US government security. First it was by the mechanism of QE2, second it was by selling the junk accumulated over the past few years and buying the long-end of the national debt, and now, with the news coming out over the past few days it it will be via the alteration of the maturity of the Fed’s assets. They’re ‘sticking to the plan’ (as we have maintained over recent weeks), the question is only; what kind of price action will induce the resumption of indulgently debauched monetary policies of 2007/2008? Here I present the usual Federal Reserve balance sheet charts.

 

Federal Reserve Balance Sheet Chart - ASSETS

Assets of the Federal Reserve - Click to enlarge. Source: Federal Reserve

 

The total size of the Federal Reserve’s balance sheet contracted by just under $6 billion over the week ending Wednesday, 21 September. On the assets side of the Fed’s balance sheet the contraction came from a reduction in the holdings of Federal Agency Debt Securities (-$1.5 billion), Mortgage-backed securities (-$5.7 billion) and the Maiden Lane junk (-$2.8 billion). This was somewhat offset by an increase in the holdings of – you guessed it – US Treasury notes and bonds (+$4.1 billion).

 

Federal Reserve Balance Sheet Chart - ASSETS (PROPORTIONAL)

Assets of the Federal Reserve Presented on a Proportional Basis - Click to enlarge. Source: Federal Reserve

 

The trend towards a Federal Reserve note that is increasingly ‘good for’ US Treasury notes and bonds is evident in the chart above.

 

Federal Reserve Balance Sheet Chart - LIABILITIES

Liabilities of the Federal Reserve - Click to enlarge. Source: Federal Reserve

 

As mentioned in this week’s daily treasury statement update, the US Treasury’s cash balance increased significantly of late. Mostly this was reflected in the liabilities of the Fed by an increase of around $58 billion in the US Treasury’s general account at the Fed and a decrease of around $71 billion in ‘Other deposits held at depository institutions’.

 

Federal Reserve Balance Sheet Chart - LIABILITIES (PROPORTIONAL)

Liabilities of the Federal Reserve Presented on a Proportional Basis - Click to enlarge. Source: Federal Reserve

 

'Central Bank Liquidity Swaps' - Federal Reserve

'Central Bank Liquidity Swaps' - Federal Reserve - Click to enlarge. Source: Federal Reserve

 

The Fed’s ‘central bank liquidity swaps’ remain tiny in comparison to 2007-2009. However, it’s worth watching this balance sheet item to gauge the desperation for dollars in the international banking system.

 

'Central Bank Liquidity Swaps' - Federal Reserve (LOG SCALE)

'Central Bank Liquidity Swaps' - Federal Reserve (on a logarithmic scale) - Click to enlarge. Source: Federal Reserve

See here for our collection of rare historical economic data.

Posted Sep 25, 2011