MNI POLICY: Fed Balance Sheet -USD37B to USD7.05T

The Fed's balance sheet assets slumped USD37 billion over the past week to USD7.05 trillion as the central bank's holdings of residential mortgage-backed securities rolled off, while reserve balances fell by USD105 billion, data released Thursday showed.

The Fed's decline in holdings were driven by residential mortgage-backed securities rolling off by USD42 billion and currency swaps with foreign central banks falling by USD8 billion to USD24 billion, a new low since March.

This was offset as Treasury holdings increased by USD14 billion to a record USD4.4 trillion. The Fed's nominal notes and bonds holdings increased by USD10 billion and its TIPS holdings increased by USD3 billion.

Total assets peaked at a record USD7.17 trillion June 10 but have since remained steady near USD7 trillion. The Fed's total portfolio is up 67% since early March at 36% of U.S. GDP.

ASSETS MAY RISE

Fed Chair Jerome Powell has affirmed plans to continue its asset purchases to support an economy reeling from Covid-19, with buys of at least USD80 billion per month of Treasuries and at least USD40 billion of MBS. Yet, regional Fed leaders have tamped down expectations for expanded bond buying to come soon, and San Francisco's Mary Daly told MNI this week there's no strong case to shift the mix of the central bank's asset purchases out the yield curve.

On the liabilities side, an increase in the Treasury General Account by USD120 billion generated a corresponding decrease in bank reserves by USD105 billion to USD2.74 trillion.

The Treasury General Account, now at USD1.78 trillion as of Sept. 30, according to separate Treasury data, has jumped because of tax payments to the government.

The Fed's total assets could reach USD7.45 trillion at year-end, Wrightson ICAP wrote earlier this week. With stimulus talks in Congress on the rocks reserve balances could climb to USD3.0 trillion by the last week in October and then climb steadily to USD3.5 trillion by early December.