In recent conversations with our accounts, we have been hearing more concern about the Fed’s second round of quantitative tightening (QT2), which started this month. QT1, which lasted from October 1, 2017 to July 31, 2019, pared the Fed’s balance sheet by $675 billion.
Under QT2, the Fed will reduce its balance sheet by running off maturing securities. From June through August, that will involve dropping its holdings of Treasury securities by $30.0 billion per month and its holdings of agency debt and mortgage-backed securities by $17.5 billion per month. So that’s a decline of $142.5 billion over the next three months. Starting in September, the runoff will be set at $60 billion for Treasury holdings and $35 billion for agency debt and mortgage-backed securities. That’s $95 billion per month and $1.14 trillion over a 12-month period.