MNI POLICY: Fed Balance Sheet Shrinks, 1st Time Since February

--Declines On Repos And FX Swaps

By Evan Ryser

     WASHINGTON (MNI) - The Fed's balance sheet shrank for the first time since

late February as foreign exchange swaps and repo agreements rolled off, in a

week where Jerome Powell moved to tweak corporate bond purchases and make Main

Street loans more effective. 

     The portfolio shrank USD74 billion to USD7.09 trillion, driven by a USD92

billion decline in FX swaps and a USD88 billion decline in repos. The balance

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

     Policy makers say declining use of some emergency financing brought in when

Covid-19 froze up markets is a sign the programs are helping return trading to

normal. Powell told Congress the Fed will likely freeze the balance sheet in a

few years then let it shrink relative to GDP. "We are generally a

hold-to-maturity entity," Powell said, adding the Fed could eventually sell

bonds.

     Treasury holdings increased USD19 billion to a record USD4.17 trillion and

MBS held outright increased by USD83 billion to USD1.92 trillion. Powell said

the Fed is considering adding non-agency RMBS into the Term Asset-Backed

Securities Loan Facility that opened this week. 

     --EMPTY MAIN STREET

     The much-awaited Main Street lending program saw no use as of yet, while

the corporate credit facility increased at a USD300 million daily average. The

Fed is also creating a broad and diversified index for corporate bond purchases.

     "If market functioning continues to improve, then we're happy to slow or

even stop the purchases," Powell told lawmakers. "If it goes the other way, it

will increase." 

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

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