What's happening to the Fed's balance sheet?
Fed assets are down more than $1.5 trillion from their peak (from $9,014 billion to $7,490 billion), but that represents less than 32% of the accumulated monetary expansion from March 2020 to March 2022 (a net increase in the balance sheet of $4.8 trillion). The starting point in March '20 was $4.2 trillion, and the current balance sheet is $7.5 trillion.
Quantitative Tightening (QT) Program
The Quantitative Tightening (QT) program is only partially executed - actual realized assets are $1,513 billion (plan - $1,983 billion, 76% execution), with treasuries down by $1,194 billion (plan - $1,253 billion, over 95% execution) and MBS down by $319 billion (plan - $730 billion, 44% execution), i.e. a complete failure and a major deviation from the schedule for MBS. The actual volume of QT is about $74 billion (at this rate securities have been dumped since the beginning of 2024 and about the same amount earlier), not the announced $95 billion.
Reverse Repurchase Agreements (Repo)
Fed reverse repo volume has fallen to $436 billion in early April versus $720 billion in early January 2024, $1,342 billion in early October, an average volume of $2.25 trillion in March - May 2023 (exactly one year ago), and about $2.4 trillion at the peak in September 2022.
The reverse repayment will be zeroed out around June 2024. There is no problem in zeroing; the existence of such an anomaly is a consequence of excess liquidity. The problem is that this excess has become a resource for repayment of the new issue of US Treasury bills. The monetary position of the US Treasury at the Fed is $732 billion (about 4 months of the average annual deficit, assuming no new net issuance). This is enough to get through the fall without problems, but there could be problems near the end of the year.
Emergency Lending Program
The Emergency Lending Program (current volume $135 billion vs. a peak of $400 billion a year ago), which began in March 2023 in response to the banking crisis, is shrinking as loans taken out under the Emergency Bank Financing Program (the program has ended) are repaid.
Conclusion
Overall, the U.S. Federal Reserve's balance sheet has shrunk by more than $1.5 trillion from its peak due to the partial implementation of the quantitative tightening program. However, deviations in the reduction of mortgage-backed securities are a cause for concern, as are ongoing problems with excess liquidity. As the emergency lending program shrinks, there could be problems with outstanding loans. With loan repayments expected to be zero by June 2024, managing liquidity and financial stability remains critical for the Fed.