The Glacial Taper Continues!

By Anthony B. Sanders

Fed’s Treasury Note and Bonds Holdings Back To April ’14 Levels While Agency MBS Holdings Back To August ’15 Levels

It took the Fed five-and-a-half years to amass $3.4 trillion in Treasury securities and mortgage-backed securities (MBS) during Quantitative Easing (QE). The Fed is now reversing that process, including the opposite of “tapering,” as it is “ramping up” its QE unwind. Call it “the glacial tapering.”

The Fed’s balance sheet for the week ending June 6, released Thursday afternoon, shows a total drop of $141 billion since October, the beginning of the era officially called “balance sheet normalization.” At $4,319 billion, total assets have dropped to the lowest level since May 7, 2014, during the middle of the “taper.”

If the Fed continues to follow its plan, it will shed up to $420 billion in securities this year, and up to $600 billion a year in 2019 and each year in the future, until it considers its balance sheet to be “normalized” — or until something big breaks. For May, the plan calls for the Fed to shed up to $18 billion in Treasuries and up to $12 billion in MBS.

On the Treasury note and bond side, we are back to April  2014 levels.

treaswith

On the agency MBS side, The Fed’s holdings are also dropping and are back to August 2015 levels. But they are not declining that rapidly.

agencymbs.png

Taken together, you can see the total assets of The Federal Reserve (red line) are glacially tapering, even though M2 money stock growth YoY is near its lowest level since 2010.

m2moneyres.png

So while The Fed could electronically print money and purchase Treasury notes/bonds and agency MBS, it could take a long time to withdraw it from the economy without causing turbulence.

taper

air-turbulence

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