MNI POLICY: Fed Balance Sheet Grows to Record USD7.18 Trillion

The Federal Reserve's balance sheet increased to a record USD7.177 trillion this week, just surpassing the previous mark set in June on holdings of Treasuries, data released Thursday showed.

The balance sheet has grown 72% from the beginning of the year and is now 33% of the size of the U.S. economy before the crisis struck, up from 19% of GDP at the beginning of the year. Analysts expect it to grow in the months ahead and perhaps peak at 40% late next year.

Over the last week the Fed's assets increased USD26 billion, primarily from a USD25 billion increase in Treasury holdings. The Fed purchased about USD21 billion in nominal notes and bonds and USD4 billion in TIPS, pushing up the total Treasury holdings to a record USD4.5 trillion, up USD2.2 trillion since the beginning of the year.

Holdings of mortgage-backed securities were up USD400 million to USD2.05 trillion. Currency swaps with foreign central banks increased for the first time since May, up USD164 million to USD8 billion. FX swaps peaked at USD450 billion in late May.

PRIOR RECORD

The prior balance sheet record was USD7.174 trillion on June 10, but since then roll-off from the Fed's emergency measures and FX swaps has kept the balance sheet relatively steady as gains from asset purchases have slowly made up the loss. Many of the Fed's emergency lending programs are currently scheduled to be terminated at year-end.

On the liabilities side, the Fed's RRP pool for foreign official institutions has fallen to USD187 billion from a recent high of USD287 billion on April 1, a new five-year low. Analysts predict it could have room to fall further in the months ahead. The Treasury's cash balance at the Fed also increased by USD52 billion to USD1.7 trillion, generating a corresponding decrease in bank reserves by USD17 billion to USD2.89 trillion.

The Fed is buying at least USD80 billion a month of Treasuries and USD40 billion of MBS as it seeks to keep markets that froze up early in the pandemic running and to meet its longer-term goals of full employment and 2% inflation that have been shredded by the steepest recession since the 1930s.