After three months of record growth, which increased from $ 3 trillion to $ 7.2 trillion, the Fed balance sheet posted its second consecutive weekly decline since the onset of the crown crisis, according to data. latest H.4.1 statement,
Although this decline was not as large as the last week drop, which was the largest since May 2009, a weekly decline of $ 12 billion to $ 7.082 trillion was certainly noticeable at a time when virtually every asset class is currently due to the rise and fall of the Fed balance.
The fall, however, was not due to a reversal or even a slowdown in QE, which continues almost every day, when the Fed added more than $ 52 billion to treasury bonds and MBS for the 7 days ending June 24, but because of the second consecutive decrease in liquidity swap , which fell by $ 77.5 billion to $ 275 billion after a decrease of $ 92 billion the previous week. The number of outstanding repo agreements also declined over the second consecutive week by a modest $ 8.9 billion.
The total amount of debt on swap lines, designed to facilitate the growth of demand for American currency in the jurisdictions of participating banks in the first weeks of the crisis, was the lowest since the beginning of April.
Combined with other signs of weakening demand for the Fed’s aggregate funds for quick liquidity, the reduced use of the currency swap line is a sign for many analysts that global financial markets are returning to near normal after they were supported by the outbreak of coronavirus in February and March, “ We expect a faster decline in the coming months, as most swaps will be discontinued, ”Citigroup economists wrote last Friday.
The downside is that this also means that the system again sees a decrease in the turnover of the world reserve currency, a clear tightening of its financial condition, and the negative global impact of any macroshock will be significantly greater if and when someone hits it. coming weeks.
Meanwhile, due to the fact that the S & P500 closely monitored the Fed’s balance sheet over the past three months, which was the main factor in the market rebound, the last weekly drop coincides with a period of increased volatility in the last three weeks.
The contraction occurs at a time when the Fed’s monthly liquidity injections were decreased to $ 120 billionThis suggests that although the balance is likely to resume growth next week, it will develop at a slower pace.
It also means that for stock market growth from now on – since the market is currently completely disconnected from fundamental factors and simply derived from endogenous liquidity and cash flow – Powell will need to find another excuse for aggressively expanding the Fed’s QE. Something like the second wave of the coronavirus pandemic …
Finally, those who keep track of how many corporate bonds the Fed bought, the latest amount for the Fed on corporate loans LLC, which includes purchases of both ETFs and corporate bonds, the Fed said that as of June 25, the book had 8 , 3 billion. US dollars. the cost of holdings (the Fed does not show how many real bonds it bought compared to ETFs), and an increase of $ 1.7 billion compared to $ 6.6 billion a week earlier. This means that the Fed is now buying around $ 350 million in corporate bonds and / or ETFs every day.