QT (Quantitative Tightening) Purpose & Goals

QT is the Fed’s process to mop up the $9 trln-plus excess liquidity they and the Congress, through heavy deficit fiscal spending, created over the last three years.  Since starting in June 2022, the program allows securities purchased during QE (Quantitative Easing), from early 2021 through early 2022 to mature without replacing them.  After an initial ramp up period from June ’22 through September ’22, the Fed’s Program is to allow up to $95bln to mature each month.  The QE, and thus the QT, Programs dealt with two types of securities- Treasury Securities and Mortgage-Backed Securities.

We are now roughly one year into QT.  At this point the Fed’s target was to have $952b roll off its books.  A continuing draw-down of $95b per month unwinds QE over the next ~8 years.  But, as with the best laid plans of mice and men, the March ’23 Silicon Valley Bank collapse along with three other troubled banks once again required Fed lending action.  The rapid rise in interest rates caused deposits to move from low rate bank accounts to higher yielding (MMA) money market accounts.  These events have a direct impact on the Fed’s balance sheet that compliment and cancel the effect of QT overall.

Below are three different ‘Cases’ of the progress of QT on the Fed’s books overall.  The Base Case is the narrowest and includes just Treasury and MBS holdings.  Case #2 adds RRepos (Reverse Repos) to the Base Case.  Case #3 uses three upper level accounts that include those accounts above but looks at the broad accounts they are sub-accounts of. Also, the 03.08.2023 reading is the last before the bank emergency.

Case #1: Base Case

Case #2: Base + RRepos

Case #3: Upper level, Broader Accounts

Summary Comments

The Fed QT Program is short of the target it set out last year, but real life got in the way.  The obstacles include the unintended consequences of the Fed’s own super aggressive rate hiking.  Bond prices tanked, hurting the assets banks held as investments for liquidity needs.  Bank savings rates were slow to rise, opening the door for deposits to move to higher paying money market funds.  Those funds, in turn, park those deposits at the Fed in RRepos facilities where they are no longer considered system reserves.  Thus our inclusion of Case #2 above.

Case #3 uses ‘parent’ accounts on the Fed balance sheet to include the natural “rob Peter to pay Paul” dynamic that their narrower ‘child’ accounts miss.  We see that although behind, progress is proceeding, slowly mopping up the systems excess liquidity problem.