The Fed raised the Fed Funds Rate by 0.25% earlier this month and again said it will continue tapering its balance sheet as a major part of its Quantitative Tightening (QT) plan. This plan was announced a year ago, and despite continued statements that it will adhere to the stated plan, it continues to fall short of its goal with respect to mortgage loans. The plan is to reduce US Treasury securities held by the Fed by $60 billion per month and mortgage securities held by the Fed by $35 billion per month. So far this year (after 4 1/2 months) less than $70 billion in mortgages have been rolled-off. By June 1, Mortgage securities were expected to be down $367.5 billion year over year. They are currently down only $159 billion year over year.
By June 1, 2023, Treasury securities held were expected to be down $630 billion year over year. They are currently down $557 billion year over year. So the Fed has is coming close enough for government work on this goal. But after the current banking crisis unfolded the Fed unexpectedly added well over $300 billion to it’s balance sheet, substantially through loans. So this added liquidity is running at cross purposes to their stated efforts to tighten.
If the Fed had stuck to it’s plan and didn’t make new loans, the balance sheet was expected to be down nearly $1 trillion (actually $997.5 billion) by June 1, 2023. As of yesterday, the year over year balance sheet reduction has been $489 billion. This is not close enough, even for government work.
The world continues to need to watch what the Fed does – and not what it says.
(Source of year over year data – https://www.federalreserve.gov/releases/h41/20230518/)
(dynamic charts with current data)