The Federal Reserve has been slowly reducing its balance sheet through a process known as Quantitative Tightening (QT). In April, the balance sheet dropped by $77 billion to $7.36 trillion, the lowest since December 2020. Since the end of Quantitative Easing (QE) in April 2022, the Fed has shed $1.60 trillion.
QT involves reducing the amount of Treasury securities and Mortgage-Backed Securities (MBS) on the balance sheet. So far, 38% of the Treasury securities and 27% of the MBS added during pandemic QE have been removed. The Fed has set caps for the runoff of these securities, with Treasury securities reduced to $25 billion and MBS remaining at $35 billion per month.
The goal is to gradually decrease the balance sheet without causing disruptions to the financial markets. As the Fed continues with QT, the balance sheet is expected to decline further. This process will impact bank liquidity facilities as well, such as the Discount Window and the Bank Term Funding Program.
Overall, the Fed’s actions are aimed at maintaining stability in the financial system while unwinding the measures taken during the pandemic.
Vocabulary List:
- Quantitative Tightening (noun): The process of reducing the size of a central bank's balance sheet by selling off assets.
- Balance Sheet (noun): A financial statement that summarizes a company's assets liabilities and shareholders' equity at a specific point in time.
- Treasury Securities (noun): Debt securities issued by the US Department of the Treasury to finance the national debt.
- Mortgage-Backed Securities (noun): Securities that represent an ownership interest in a pool of mortgage loans.
- Liquidity (noun): The ease with which an asset can be converted into cash without affecting its market price.
- Disruptions (noun): Disturbances or interruptions that impact the normal flow or operation of something.
