Home Economic Trends 3 Months of QT Down – Robert Aro

3 Months of QT Down – Robert Aro

Three months have passed since quantitative easing officially began. Per the official plan the Fed was to reduce US Treasuries by a maximum of $30 billion and Mortgage-Backed Securities by $17.5 billion per month. So far they’ve been reducing their assets by around half of the total limit of $47.5 billion a month. This was noted for the month of June (1 month of QT) and then July. Continuing from the August 3 data release until August 31, the changes are as follows.

  • On August 3 the US Treasury (UST) balance was $5,719,119,000,000. The balance on August 31 now stands at $5,694,997,000,000 for a reduction of roughly $24 billion.
  • On August 3 the Mortgage-Backed Security (MBS) balance was $2,717,552,000,000. The balance on August 31 now stands at $2,709,288,000,000 for reduction of roughly $8 billion.

One can see the peak and slow decline of the treasury holding balance when looking at the one-year chart below:


US Treasury Securities - One year chart FRED DATA

In the case of MBS, the balance hasn’t moved as much… Unlike the UST chart above, mortgage debt held by the Fed looks to have flat-lined.


Mortgage-Backed Securities - One year chart FRED DATA

If the Fed really did save the housing market in the 2007-09 crash, why haven’t they exited from mortgage debt purchases?

When looking at the entire life of the MBS balance, started in January 2009, we see a few peaks and troughs of asset purchases, but the trajectory has always been, and will continue to be, upwards and onwards:


Mortgage-Backed Securities - All years chart FRED DATA

Pay close attention to the decline in MBS that bottomed during the March 2020 COVID crash. Notice how it also corresponds with the (gray bar) COVID recession. By now it should be clear that it’s only a matter of time until the next crisis and official recession is announced, even if policy makers and statisticians are doing their best to avoid this at the present time.

Watching the Fed shrink its balance sheet and waiting for the next stock market crash can be like watching paint dry. You know it’s happening. Sometimes you’ll swear you see traces of it. But it is slow and can be a tedious process. However, September and the months ahead should be more exciting.

Beginning this month, the Fed promised to increase the rate of QT. They have now doubled the maximum cap on its reduction, so UST can decline from $30 to $60 billion, and MBS can decline from $17.5 to $35 billion.

Of course, considering the Fed has only achieved around $25 billion a month in asset reduction, it’s nearly impossible to think they’d suddenly move to $95 billion a month. Therefore, it remains in the realm of possibility, but seems highly certain this will not happen anytime soon, especially since the bi-partisan Fed may not want to sway the midterm elections by bringing on a stock market crash quite yet. Still, they should try to do a little bit more, since the optics will look worse if they don’t.

And like paint drying, once the coat is laid it’s only a matter of time until the job is done. The same can be said with this next bust cycle; it’s only a matter of time, but it’s coming.