Tuesday, December 14, 2021

Fed's current tapering by the numbers - A long way to go to normalcy

 


I have looked at the current Fed tapering in the context of the Fed balance sheet past and present. The current tapering is for $15 billion a month ($10 billion in Treasuries and $5 billion in MBS) for eight months.

The Fed balance sheet will increase by over $420 billion during these eight months and will take fed assets to over $9 trillion. 

There is no provision for reduction based on bond maturity, so the Fed will still be buying Treasury and MBS to replacing pay-down of principal and interest. 

$15 billion per month is only .17% of the current balance sheet. $120 billion will be less than 1.5% of total Fed assets. 

Fed assets will be $1.5 trillion higher in 2021 from a starting level of $7.3 trillion. The Fed balance sheet will be $2 trillion greater than July 2020 levels which is after the recession ended.

The Fed assets were $890 billion before the GFC. Fed assets were at $2 trillion after the GFC and reached a peak of $4.5 trillion during QE3. At the end of the tapering Fed assets will be over 10 times greater than pre-GFC levels, more than 2 times greater than pre-panic levels, 2 times greater than the QE3 peak, and 4.5 times greater than levels after the post-GFC in 2010. 

The tapering is just not that important relative the overall balance sheet. If the tapering quickens, the impact relative to the overall balance sheet will be small. Of course, the marginal effect may be different and the signaling impact is also different. However, investors are just not fully realizing the size of the Fed balance sheet versus the past.  

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