New York, NY – As the Federal Reserve embarks on a path of Quantitative Tightening (QT), the central bank has made significant strides in reducing its balance sheet, with total assets dropping to $7.36 trillion in April. This marks the lowest level since December 2020, following a reduction of $77 billion. Since the conclusion of Quantitative Easing (QE) in April 2022, the Fed has managed to shed a total of $1.60 trillion in assets.
In a recent announcement, the Fed clarified its plans to slow QT, outlining specific details on when, how, and by how much it will proceed with the reduction. One key aspect of the plan is to decrease the cap for Treasury securities runoff to $25 billion from the previous $60 billion, while keeping the cap for Mortgage-Backed Securities (MBS) runoff unchanged at $35 billion. Additionally, any excess MBS runoff beyond the cap will be replaced with Treasury securities, with a long-term goal of essentially eliminating MBS from the balance sheet.
The reduction in Treasury securities has been notable, with a decrease of $57 billion in April alone, bringing the total to $4.52 trillion – the lowest since October 2020. The Fed has now managed to shed 38% of the $3.27 trillion in Treasury securities added during the pandemic QE period. Treasury notes and bonds are gradually rolling off the balance sheet, with a monthly cap of $60 billion.
On the other hand, Mortgage-Backed Securities saw a reduction of $16 billion in April, totaling $2.37 trillion – the lowest level since July 2021. This represents a 27% reduction from the peak levels during QE. MBS are primarily removed from the balance sheet through pass-through principal payments, which have been impacted by a slowdown in home sales and mortgage refinancing activity.
Looking ahead, the Fed’s balance sheet is expected to continue shrinking under the slower pace of QT. By the end of May 2025, the balance sheet could potentially decrease by $630 billion, barring any acceleration in the MBS roll-off. With the Federal Reserve’s strategic approach to reducing assets, market dynamics and economic conditions will play a crucial role in shaping the future trajectory of the balance sheet.