The Fed’s “QT” Plan: Then and Now


On Wednesday, the Federal Reserve signaled that it would likely begin eliminating assets from its $9 trillion balance sheet at its meeting in early May and would do so at nearly twice the pace of its previous fiscal year. “quantitative tightening” as it faced inflation at a sustained pace. four decades high.

Minutes from last month’s central bank meeting, released on Wednesday, showed policymakers were presented with a range of options to reduce the size of its balance sheet. This pool of assets has roughly doubled in size during the coronavirus pandemic as the Fed has used purchases of Treasuries and mortgage-backed securities to smooth the functioning of the market and increase the effects of its rate cuts. of interest.

Here’s a look at what appears to be in the cards and how it differs from the 2017-2019 “QT” period.

The Fed looks set to kick off this QT cycle with just one meeting after raising its benchmark short-term interest rate for the first time since 2018.

The last time QT launched in the fall of 2017 came nearly two years after its first rate hike, which took place in December 2015.

This time, the start of the QT is also earlier relative to where the Fed will be in the overall tightening process. If rate futures are any guide, the Fed will raise its target rate to 0.75-1.00% in May at the same time as it launches QT. Last time QT didn’t start until rates reached 1.00-1.25%.

Fed officials have “broadly agreed” on a plan to cut about $95 billion a month from its holdings, split between $60 billion in Treasuries and $35 billion in MBS.

This is roughly double the maximum pace of $50 billion per month targeted in the 2017-2019 cycle. At the time, the split was $30 billion in Treasury bills and $20 billion in MBS.

During the last cycle, it took a full year for the Fed to reach its maximum cut rate of $50 billion per month. It started with $10 billion per month ($6 billion treasuries / $4 billion MBS) and increased by $10 billion per quarter until it reached its maximum rate at the fall 2018.

This time it will go from zero to $95 billion in the space of three months… “or slightly longer if market conditions warrant.” The minutes did not explain specifically how the caps would be “phased in,” a detail likely to be worked out at the May 3-4 Federal Open Market Committee meeting that is expected to kick off the process.

When the Fed launched its very first QT venture, its total balance sheet was around $4.5 trillion. In nearly two years of QT, he managed to reduce that figure from around $650 billion to just over $3.8 trillion before shutting down the program.

This time, the annualized monthly rate of reduction amounts to more than $1.1 trillion per year in balance sheet reductions. This means it will likely exceed the total for the entire 2017-2019 QT cycle by the end of this year or early 2023. Many economists see officials aiming for around $3 trillion in total reduction of the assessment over a three-year period.

According to data from the New York Fed, the Fed’s Treasury portfolio this time has a shorter maturity than in the previous QT cycle of about two years. This is partly due to substantial purchases of Treasuries, particularly at the start of the crisis, to help restore market stability.

Minutes showed that officials were considering repayments of Treasury bills, which mature in a year or less, when the repayment of coupon securities, which are notes and bonds with a maturity of more than a year , is less than the ceiling. Treasuries are highly valued by private investors and reducing their stock by the Fed would make it easier for the US Treasury to issue them.

Furthermore, officials generally do not view treasury bills as a necessary part of their holdings necessary to ensure an adequate supply of reserves for the banking system under their current operation.


Minutes showed officials expect MBS redemptions to be below the $35 billion per month cap. Indeed, mortgage interest rates in the United States have already risen significantly, slowing the rate of “prepayments” that typically occur when rates are low and homeowners have an incentive to refinance their existing loans. This triggers a loan repayment and shortens the term of a mortgage obligation. Conversely, when rates rise, fewer bonds will mature each month.

Officials “generally agreed”, however, that it would be appropriate to consider outright sales of MBS “after balance sheet liquidation is well underway to allow for appropriate progress towards a longer-term portfolio… composed mainly of Treasury securities”.
Source: Reuters (report by Dan Burns; editing by Andrea Ricci)


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