Kevin Spires, CFA, FRM

The Federal Reserve just released their weekly balance sheet update (Fed H4.1 Report) and Monetary Base update (Fed H3 Report).  The Federal Reserve has held their balance sheet relatively constant just below 3 Trillion USD this year, with no growth in total over the past 12 months.

Over the past 3+ years, the composition of the Fed's balance sheet has changed, with most of the special programs rolling off and being replaced with Treasuries and Agency Mortgage Backed Securites (MBS).  At the height of the Crisis, special programs took up 1.5 Trillion of the Fed's Balance Sheet.

With the Federal Reserve not expanding their balance sheet, the supply of high powered money - the Monetary Base - has stagnated.  Over the past year, the Monetary Base has actually dropped by a bit over 1%.  This is not yet a worry, as most of the Fed Money Printing was just kept as excess reserves (which had reached 1.58 Trillion at their peak) on deposit with the Federal Reserve and not lent out.  The Monetary Base less the excess reserves   has grown at a healthy 9%+ rate over the past year.

While not yet a concern, because there are still 1.4 Trillion in excess reserves that banks could use to propel increased lending, these reports should be followed closely to see if banks are starting to lend out their reserves, or conversly, pull back from lending.

Kevin Spires, CFA, FRM

The Federal Reserve releases an accounting of its Balance Sheet every Thursday.  The Fed's Balance Sheet has tripled in the past four years - although it has been stable for the past 12 months.  Most of the Fed's Balance Sheet is now Treasury Securities or Agency Guaranteed Securities (Both Mortgage Backed Securities ie.MBS and Straight Debentures).

It will be interesting to see if the Fed returns its Balance Sheet to the long term trend - which would require close to two trillion in Asset reductions.  I expect they will be cautious about announcing the removal of this stimulus - although it might happen sooner than most think.  Most think that the Asset Sales (or Asset run-offs as they decide not to reinvest proceeds) will start before they begin to raise the funds rate.

It should be interesting to say the least.  I think the Fed is waiting for more clarity on the Tax & Spending policies of the next Congress and President before clarifying how they will remove the massive amounts of monetary stimulus.