QT To Put Renewed Pressure On Reserves Over Time (2/2)

Over time, QT will be a clear drain on bank reserves - but there was no change in the size of the SOMA portfolio (ie bond and bill holdings remained level) in the week to Aug 9. Fed assets holdings were little changed, with a net increase of $1.5B, to $8.21T.

• As for other assets that have been responsible for funding reserve balances, the key category is extraordinary lending to financial institutions - and that is showing only a slow drawdown vs March peaks.
• Last week these facilities fell in size by $1.7B, with a $2.7B fall in "other credit extensions" (Fed temporary lending to the FDIC for the purposes of failed bank resolution) offset by a $1.2B rise in Bank Term Funding Program (BTFP) takeup to a fresh high of $1.2B.
• Stripping out the $33B in Pandemic 13-3 Programs still on the books, and the remaining $250B is the reason why bank reserves are $228B higher now than they were before March when the Fed began assisting banks more aggressively.
• "Other credit extensions" will continue to wind down, but that looks to be offset by marginal gains in the BTFP (albeit to far less than the multi-trillion dollar size that some analysts had anticipated when the program was launched in March). In the meantime, the drawdown in the Fed's SOMA portfolio (falling by an average $55B a month) will play a bigger role in shrinking reserves.

Source: Federal Reserve, MNI