Annabelle Drollers, Bloomberg
23:00 | September 1, 2022
Updated: 01:07 | September 2, 2022
The Federal Reserve is on track to double the pace of quantitative easing as early as this week. The balance sheet will start shrinking by $95 billion a month—that’s $60 billion in bonds plus $35 billion in mortgage-backed instruments.
Here’s why this is unique: To shrink its bond holdings by $60 billion a month, the Fed would have to grab piles of bonds before they mature and put them on the market to fill those cracks in the graph.
For this month, sales of $60 billion will be needed, for the next – just under $14 billion.
The amount varies from month to month, but it will effectively drain liquidity from the system.
One possible consequence is that money market funds may take some of that $2.2 trillion in cash, partly in the Fed’s repo program, to buy the bonds that are on sale in the market.
We may be seeing a gradual decline in the use of this program from current record levels. Here’s something important to keep an eye on in the coming weeks and months.