Central Banks

Thursday, July 2, 2020 - 18:16

MNI POLICY: Fed Balance Sheet Glides Lower For 3rd Week

By Evan Ryser

WASHINGTON (MNI) - The Fed's balance sheet edged down for a third straight week as FX swaps and repos continued to roll off, Fed data released Thursday showed.

The Fed's portfolio shrank USD73 billion to USD7.01 trillion, driven by a USD50 billion decline in FX swaps and a USD10 billion decline in repos. Usage of dollar swap lines by global central banks fell to USD225 billion from as high as USD450 billion only a month ago. There was also rare use over the last week of the Fed's temporary repo facility for foreign central banks, known as FIMA, of USD1 billion.

The balance sheet was still up 67% from USD4.24 trillion in early March.

The Fed is still buying Treasuries, an additional USD16 billion for the latest week, reaching another record high for total Treasuries outright. But this was more than offset by a USD32 billion fall in residential mortgage-backed securities. Purchases of corporate bonds continued at just under a USD300 million daily average.

There was also an increase in loans through the Paycheck Protection Program by USD5.5 billion. The TALF facility saw an increase for the first time, up USD253 million.


Several emergency 13(3) liquidity facilities have continued to shrink in recent weeks. The Fed also continues to reduce its spending on support for money market funds, down by an additional USD2.3 billion. And there was also a decrease in the primary dealer credit facility by just over USD1 billion.

Fed officials and outside analysts have maintained that the positive effect from Fed buying is more qualitative than quantitative. Former Fed officials have told MNI that they expect the many of the 13(3) facilities to be extended past their current late September termination date.

The Main Street lending program still has not seen any usage, when controlled for Treasury contributions. And the municipal liquidity program has stalled since making its first loan to the state of Illinois in early June.

Many former regulator including ex-Fed Chair Ben Bernanke have questioned whether the Fed has been too strict in setting up its programs extending credit to smaller businesses.

Fed Chair Jerome Powell told Congress earlier this week that more than 300 banks were participating in the Main Street program but they were "not getting a ton of interest."

Given the slow uptake, improving credit landscape and remaining hurdles for some emergency facilities, some analysts have cut their projections for the Fed's balance sheet to peak around USD9 trillion.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com


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