Keeping you up to date on the latest data releases.
July 2014 :: Monetary Policy
- The US current account deficit narrowed to −$81.1 billion in the fourth quarter of 2013, a $15.2 billion contraction from the third quarter’s revised −$96.4 billion deficit (−$94.8 billion, previously). As of the fourth quarter of 2013, the current account deficit was the smallest since the third quarter of 1999. The current account deficit has now contracted in six of the past seven quarters. The contraction was driven by a $12.9 billion decrease in the balance of trade in goods, services, and income. Both imports and exports of goods, services, and income increased in the fourth quarter; however, exports surged by 2.5 percent, which overshadowed an increase of 0.4 percent in imports. As a percent of GDP, the current account deficit declined to 1.9 percent from 2.3 percent in the third quarter, which is the smallest recorded percentage since the third quarter of 1997.
- In the third quarter of 2012, the U.S. current account deficit contracted to −$107.5, a 10.6 billion decrease from the second quarter’s revised −$118.1 billion deficit (−$117.4 billion, previously). The narrowing marks the second consecutive quarter of contractions in the deficit. As a percentage of GDP, the current account fell 0.3 percentage points to 2.7 percent, the smallest ratio since the fourth quarter of 2009. Driving the overall contraction, the goods deficit fell $11.8 billion—the largest contraction since the first quarter of 2009‐to a level of $173.9 billion while the services surplus increased $1.1 billion to $49.4 billion. Exports of goods, services, and incomes increased in the third quarter by $1.2 billion to a level of $736.9 billion. Imports of goods, services, and incomes contracted for the second consecutive quarter, decreasing $10.4 billion to $810.6 billion
- At the June Federal Open Market Committee meeting, the committee decided to continue the Maturity Extension Program through the end of 2012. It is estimated that the total additional sales and purchases related to the program will be $267 billion. A tentative schedule for Treasury operations for July was released at the end of June, with purchases expected to outpace sales by $6 billion. Also during the month of June, the Maiden Lane I and Maiden Lane III vehicles completely repaid their outstanding loan balances. All three Maiden Lane vehicles have now repaid their loans, and the combined remaining portfolio value for the three facilities is over $15 billion. Throughout the month, the outstanding amount of dollar liquidity swaps increased from $22.3 billion to $28.0 billion. Finally, the rules for the Term Asset-Backed Securities Loan Facility (TALF) were revised in June so that the amount of credit protection provided by the Treasury is now $1.4 billion. The outstanding amount in the TALF now stands at $4.5 billion.
- In May, the New York Fed agreed to sell another collateralized debt obligation (CDO) from the Maiden Lane III portfolio. The securities were auctioned off, and the details will be reflected in the next quarterly report scheduled for July 16, 2012. Combined with an asset sale in April, the outstanding loan balance for Maiden Lane III now stands at just under $3 billion, and the portfolio value remains just over $15 billion. During the last week of May, the outstanding balance of dollar liquidity swaps rose for the first time since March, but the balance still remains close to its lowest point since last December. The Treasury purchase schedule for June was released, again with slightly more purchases planned than sales.
- During April, the values of the Maiden Lane I and Maiden Lane III portfolios were revalued. Following the revaluations, Maiden Lane I was up about $120 million and Maiden Lane III was up $2.3 billion. It was also revealed in April that the holdings of the MAX CDO in the Maiden Lane III portfolio were sold to Barclays and Deutsche Bank through a competitive bid process. Bids for the MAX CDO holdings were submitted by eight broker-dealers. Outstanding balances for the central bank dollar liquidity swap lines continued their decline, falling from about $46 billion to $27 billion. The Treasury General Account experienced a tax season spike, climbing from $55 billion to $120 billion, and foreign official and international account reverse repos jumped nearly $10 billion to $98 billion. Eight banks were added to the Fed’s reverse repo counterparty list during the week as well, including Credit Suisse, Deutsche Bank, Royal Bank of Canada and Societe Generale.
- The month of March saw a steady decline in the outstanding balances of central bank dollar liquidity swaps after the European Central Bank’s second Long-Term Refinancing Operation in late February. Outstanding balances fell from roughly $110 billion to $46 billion over the course of the month. The Treasury’s general account was erratic throughout the month as the end of the first quarter neared, spiking from $37 billion to $103 billion before falling back to $55 billion. Also, tests continue for the Fed’s reserve management tools, as there were reverse repurchase agreements and Term Deposits outstanding during the month. Another item to note is the decline in the portfolio holdings of agency debt, which dropped below $100 billion for the first time since July 2009.
- In the fourth quarter of 2011, the U.S. current account deficit expanded to −$124.1 billion, a $16.5 billion increase from the third quarter’s downwardly revised −$107.6 billion deficit (−$110.3 billion, previously). The deficit in the fourth quarter was nearly $10 billion more than consensus forecasts had predicted. Additionally, the deficit widened to the largest level in three years. As a percentage of GDP, the deficit marked 3.2 percent, up from the third quarter’s two year low of 2.9 percent. Main drivers behind the widening of the current account deficit were an increase in the trade deficit by $6.4 billion to −$141.1 billion (−$134.7 billion, previously) and a decrease in the surplus on income by $10.3 billion to $50.3 billion ($60.6 billion, previously). The expansion of the trade deficit is consistent with international trade data that shows imports growing faster than exports.
Over the course of February, the New York Fed sold the remaining securities held in the Maiden Lane II portfolio. During the month, securities with a current face value of $12.2 billion were distributed to Goldman Sachs and Credit Suisse through a competitive auction. The sales will result in the full repayment of the $19.5 billion loan extended by the New York Fed and generate a net gain for the benefit of the public of approximately $2.8 billion.
The tentative schedule for outright Treasury operations for the month of March was released at the end of February, with an announced schedule of $44 billion of purchases and $43 billion of sales. Also, it was announced at the end of the month that the New York Fed would conduct another series of small-scale reverse repo operations using all types of available collateral. The operations were scheduled to ensure that the new set of counterparties—8 banks and 2 new primary dealers—was properly set up to process the transactions. Outstanding balances on the central bank dollar liquidity swaps remained fairly constant over the month, hovering near $110 billion.
- The balance sheet increased nearly $5 billion over the course of January, which can roughly be attributed to an increase in the amount of central bank dollar liquidity swaps drawn. The outstanding draws increased from $99.8 billion to $104.5 billion in January, with nearly $77 billion of that amount taken in 3-month swaps by the European Central Bank. Following a request for assets from the Maiden Lane II portfolio, the New York Fed auctioned over $7 billion worth of securities in early January, with the winning bid going to Credit Suisse Securities. The tentative schedule of outright Treasury operations for the month of February was released at the end of the month, with an announced schedule of $45 billion of purchases and $43 billion of sales. Finally, it was announced that the Fed earned $83.6 billion in 2011 in interest income on securities acquired through open market operations (U.S. Treasury securities, agency mortgage-backed securities and agency debt). Another $2.3 billion was earned as realized gains on the sale of U.S. Treasury securities.
- December’s news was dominated by the dollar liquidity swap lines extended to foreign central banks. At the end of November, the Fed announced that the swap operations would be made available to foreign banks at a lower interest rate. Throughout December, the balance of swap operations outstanding expanded from $2 billion to nearly $100 billion. The largest user was the European Central Bank, which drew $85 billion, but operations were also conducted with the Bank of Japan and the Swiss National Bank. Closing out the year, the balance owed to the Fed by the three Maiden Lane vehicles fell under $20 billion, down from $52 billion at the beginning of 2011. Regarding Operation Twist, the New York Fed announced in the last week of December that they would purchase and sell approximately $45 billion of Treasury securities during the month of January. The mortgage-backed securities (MBS) reinvestment strategy has also continued as planned, with purchases of MBS starting to settle on the books of the Fed. Typical year-end increases were noticeable in the balance of Treasury deposits at reserve banks, which spiked from $21.5 billion to $112.4 billion.
- In the third quarter of 2011, the U.S. current account deficit narrowed to −$110.3 billion, a $14.4 billion contraction from the second quarter’s upwardly revised −$124.7 billion deficit (−$118 billion previously). As a percentage of GDP, the third quarter’s 2.9 percent marks the lowest percentage since late 2009. Additionally, the third quarter contraction represents the most pronounced decline since early 2009 and more than reverses the widening of the current account deficit that occurred in the first half of 2011. A contraction in the trade deficit, falling $12 billion to −$135.6 billion (−$146.2 billion previously), contributed to the narrowing of the overall current account deficit. The narrowing of the trade deficit was in turn driven by a decrease in the goods deficit to $181.8 billion from $190.6 billion as well as an increase in surplus on income to $58.3 billion from $56.9 billion.
- The biggest balance sheet news of the month came on the last day of November. The Fed, along with five other central banks, announced changes to its liquidity swap arrangements. On the dollar liquidity that the Fed provides, the rate charged to other central banks is now 50 basis points over the overnight index swap rate instead of 100 basis points. For liquidity in the other currencies, the arrangements were reactivated through February 1, 2013, but the terms will only be determined if the need for those swaps arises. The change occurred after a month of elevated financial stress in Europe, and after the level of dollar liquidity swaps drawn by foreign central banks hovered around $2 billion throughout November. On the last day of November, the New York Fed added 8 banks to its reverse repurchase agreement counterparty list, including Bank of New York Mellon, Barclays, Citibank, Morgan Stanley, and Wells Fargo. Also, as part of the Maturity Extension Program, the New York Fed announced its plans to buy $45 billion in long-term Treasury securities and sell $52 billion in short-term Treasury securities. On the balance sheet, the balance of TALF loans has fallen below $10 billion for the first time since May 2009. The balance of agency mortgage-backed securities has fallen from $879 billion to $829 billion since the September Federal Open Market Committee meeting.
- The Maturity Extension Program began in October. The Fed started selling short-term (1- to 3-year) Treasury securities and purchasing long-term (7- to 30-year) Treasury securities. In addition, the reinvestment of principal payments on agency debt and agency mortgage-backed securities (MBS) has been reinvested in agency MBS. The European Central Bank expanded their drawings on their dollar liquidity swap over the month of October. On top of the $500 million, 7-day draw the ECB had been making, they added an 84-day swap for $1.353 billion. In late October, the Maiden Lane portfolios were revalued according to current market values. All three portfolios lost value. Maiden Lane I went from $14.5 billion to $12.9 billion, Maiden Lane II went from $9.9 billion to $9.5 billion, and Maiden Lane III dropped from $20.4 billion to $18.0 billion. Perhaps an interesting side effect of the recent balance sheet operations, the amount of securities lent to dealers reached its lowest point of 2011 over the past week, below $10 billion lent.
The biggest balance sheet news in the month of September was the Federal Open Market Committee’s (FOMC) statement following this month’s policy meeting. Over the next nine months, the Fed is expected to sell $400 billion of short-term (1- to 3-year) Treasury securities and use the proceeds to purchase an equivalent amount of longer-term (7- to 30-year) Treasury securities. The FOMC also agreed to take the incoming principal payments from its holdings of agency debt and mortgage backed securities (MBS), which had previously been reinvested in Treasury securities, and reinvest the funds in more agency MBS. The first set of new agency MBS purchases occurred in the first week of October, amounting to nearly $4 billion. Early in September, an announcement out of Europe suggested that the European Central Bank (ECB) would begin to take advantage of the dollar liquidity swap line that it has established with the Fed. Since the announcement, the ECB has withdrawn no less than $500 million each week to provide dollar liquidity to European banks. Also, preparatory Term Deposit auctions have continued, with the most recent auction drawing just over $5 billion. Each of the Maiden Lane vehicles made payments on its outstanding loans during the month, and Maiden Lane I’s payment was a fairly significant $3 billion.
- For the first time since March, the central bank liquidity swap lines were tapped. The Swiss National Bank (SNB) drew $200 million on their line the week of August 17, and then the European Central Bank (ECB) drew $500 million on its dollar liquidity swap line the following week. In opposition to the SNB operation, which appeared to be for a foreign exchange intervention, the ECB move looks to be in support of struggling European banks. There has been a noticeable jump in foreign official reverse repurchase agreements in addition to the use of the liquidity swap lines. The reverse repo operations allow foreign central banks to temporarily acquire some of the Fed’s security holdings. Data is not available on which central banks have been conducting the operations, but those balances have jumped from roughly $70 billion to $100 billion throughout August. Maiden Lane I made another sizable payment on its outstanding loan, while Maiden Lane II and Maiden Lane III made smaller dents in their outstanding balances.
Payments were made by all three Maiden Lane vehicles on their outstanding loans this month, but Maiden Lane II continues to pay down its outstanding loan at a relatively rapid pace. The Maiden Lane portfolios were also revalued according to second-quarter security prices. Maiden Lane I showed almost no movement, but both Maiden Lane II and Maiden Lane III saw declines in their portfolio values. Maiden Lane II dropped from $11.3 billion to $10.2 billion, and Maiden Lane III dropped from $23.2 billion to $21.5 billion. Both portfolios are still expected to be profitable for the Fed.
A Term Deposit auction in the middle of July was met with much less demand than previous auctions, garnering a bid-to-cover ratio of just 1.26. The New York Fed announced that it would be accepting applications for a new set of reverse repo counterparties, this time allowing banks and savings associations into the mix. Perhaps the biggest requirement is a reserve balance of no less than $10 billion.
There seemed to have been some strange moves related to the debt ceiling debate as well. In the latter half of July, the Treasury’s General Account spiked, its Supplemental Financing Account dropped down to $0, and the balance of deposits at Federal Reserve banks from government-sponsored enterprises rose to an all-time high, topping $56 billion. In spite of these shifts and the downgrade of U.S. debt by Standard and Poor’s, the Federal Reserve Board announced that it will make no change in the treatment of any type of government-backed debt in its risk-weighting. Perhaps another sign of turmoil in the financial markets, this time in Europe, was a jump in foreign official and international accounts reverse repurchase agreements, which hit their highest mark since early 2009.
- The second round of asset purchases came to a close at the end of June. Since the start of that program, combined with the reinvestment of principal payments on current security holdings, the Fed has purchased over $700 billion of Treasury securities. A statement was released by the Fed following the most recent Federal Open Market Committee meeting that gave the New York Fed the authority to continue reinvesting principal payments on the Fed’s asset holdings in order to maintain the size of the balance sheet. Also of note, the Maiden Lane II portfolio has remained fairly constant throughout June, with no securities being offered since the first week of the month. Prices on the asset classes held in the portfolio have been trending down since the beginning of March, when the Treasury began selling a similar mix of assets. On June 29, the Fed acknowledged that it had extended the U.S. dollar liquidity swap arrangements through the beginning of August 2012. The swap arrangements are held with Canada, Switzerland, England, and the European Central Bank, and they allow foreign central banks to get dollar-denominated credit that they can lend to commercial banks in their country. Those swaps arrangements have not been utilized since March, but may be necessary as the Greek debt crisis unfolds. More preparatory reverse repurchase operations were conducted in the middle of June, primarily to incorporate the newest set of government-sponsored enterprise counterparties.
- Taking a step back and looking at the bigger picture, larger trends in the balance sheet have continued in June. Purchases of Treasury securities continue to grow at a steep pace due to the second round of large-scale asset purchases and the reinvestment of maturing agency securities. Treasury purchases related to large-scale purchasing programs have now grown from just over $320 billion in August 2010 to $1.04 trillion this week. “Lending to financial institutions,” which incorporates programs that acted as an expansion of the discount window, has remained fairly flat over that same time period, bouncing around between $125 billion and $150 billion. Programs that were extended to new markets, like money market funds and commercial paper, have been declining since August 2010. Falling under “providing liquidity to key credit markets,” these programs have dropped from nearly $110 billion to just under $78 billion. One final note, the counterparties for the Fed’s reverse repurchase agreement operations have now been expanded to include government sponsored enterprises. Eligible institutions would include both Fannie Mae and Freddie Mac, as well as all Federal Home Loan Banks.
- There are a few continuing trends from the past two weeks that have become clear in the data. First, the larger securities portfolio has increased the average securities lending activity throughout the first part of 2011, with a weekly average of $17.5 billion in lending activity. Second, the Term Asset-Backed Securities Loan Facility (TALF) portfolio has been shrinking continuously now for over a year, dropping from over $48 billion down to under $15 billion. The structure of the loans made through the TALF would suggest that there is a pretty hefty prepayment rate on these loans. Finally, the agency mortgage-backed securities acquired during the first round of asset purchases seem to be rolling off more slowly in the past couple of months than they were during last fall. Also, by our calculations, the total purchases of Treasury securities (Large-Scale Asset Purchase program 1, the reinvestment strategy, and Large-Scale Asset Purchase program 2) have now topped $1 trillion. The total amount of securities held is now over $2.5 trillion, making up the vast majority of the $2.8 trillion of total assets.
- The first-quarter revaluations for the three Maiden Lane portfolios were included in last week’s balance sheet release. Maiden Lane (ML) I jumped from $24.3 billion to $24.8 billion, ML II from $15.9 billion to $16.1 billion, and ML III from $23.0 billion to $24.6 billion. Maiden Lane II would have increased more, but it made a larger-than-usual payment on its outstanding loan this week, dropping the balance from $12.2 billion to $10.5 billion. In the past week, Maiden Lane II has also sold 46 securities with current face amounts of $2.9 billion, and presumably some of the proceeds from those sales allowed the loan balance to be significantly reduced. Securities lending activity fell by over $10 billion, from $20.7 billion to $10.1 billion, only to rebound the following week. The Treasury General Account remained elevated this week—up over $115 billion—swollen with post-tax day funds. The account has now cleared last year’s tax season peak by $40 billion.
- The tentative Treasury operation schedule for mid-April to mid-May was released last week. The Desk plans to purchase $97 billion during the period, $80 billion of that counting towards the completion of the second round of large-scale asset purchases and the other $17 billion as reinvestment. Also, there were two more bid list offerings from the Maiden Lane II portfolio, but none in the past week. The two combined to a current face amount of $1.16 billion and were composed of 50 securities, 45 of which were sold. The net portfolio value for Maiden Lane II has declined by about $90 million over the past two weeks, while the outstanding loan balance has remained flat. Maiden Lane I made a rather sizeable repayment on its outstanding loan balance, dropping the balance from $23.5 billion to $22.1 billion. Also, the balance of reverse repos outstanding returned to 0 and the balance of Term Deposits outstanding rose to $5 billion. The Treasury General Account fell back to more normal levels after the end of the first quarter, but spiked this week, presumably as a result of tax day, up to $73.3 billion.
- The New York Fed rejected AIG’s offer to buy the entire Maiden Lane II portfolio. The insurance company offered $15.7 billion for the portfolio, which had a net estimated value of $15.9 billion at the time. Instead, the portfolio will be sold through bid list offerings in smaller pieces over an extended period of time. The first sale took place on April 6, where 42 of the 52 securities offered were sold. A current face amount of nearly $1.5 billion in securities was offered, and just over $1.3 billion were sold. Monthly reports of the assets sold will be released within 15 days of the end of a month, with the first report due out May 13. The Fed released its list of Discount Window transactions to Bloomberg in the first week of April. Reports focused on the amount of lending extended to domestic branches of foreign banks and to banks on the brink of failing. Another Term Deposit Facility auction was conducted on April 4, this time a $5 billion, 28-day offer. The stop-out rate for the term deposit came in at 26 basis points and the bid-to-cover ratio was over 2, similar to previous auctions. Outstanding amount of reverse repurchase agreements also topped $1.5 billion. Other numbers to note: securities lent to dealers hit $28 billion this week, its highest mark since June 2009, continuing an upward trend as the balance sheet expands. Also, the Supplemental Financing Account has been reduced to its $5 billion target as the U.S. approaches its debt ceiling. The Treasury General Account remains at somewhat elevated levels ($54.8 billion) following the decline of the Supplemental Financing Account.
- On March 23, the New York Fed announced that it will be conducting more small-scale reverse repurchase agreement operations using all eligible collateral types. The first set of operations will be conducted with only the expanded list of mutual fund counterparties announced in January, and the second set will be open to all eligible counterparties. The operations were again cited as a matter of prudent advance planning by the Fed. Also, the balance of the Term Asset-Backed Securities Loan Facility has fallen below $20 billion for the first time since June 2009. Excess reserves have now topped $1.37 trillion after another $30 billion of Treasury securities were purchased. The Treasury General Account shot up as the end of the first quarter nears, jumping from $42 billion to $87 billion. A portion of the outstanding balances for Maiden Lane I and Maiden Lane III were repaid as well.
- Maiden Lane II made a payment on its outstanding loan from the New York Fed, dropping the outstanding balance by about $200 million to $12.4 billion. Also related to Maiden Lane II, AIG appears to have made an offer to buy the securities in the Maiden Lane II portfolio back from the Fed. AIG has reportedly offered $15.7 billion for the securities, which are currently valued at $15.9 billion. If the transaction were to take place, the Fed would still net a $1.5 billion profit. The new schedule for Treasury purchases was released on March 10, and it seems to be more heavily weighted toward the purchase of new assets (as opposed to principal reinvestment from mortgage-backed securities and agency debt) than in previous months. According to the schedule, about $110 billion in purchases will be made in the next month, $80 billion of those being new asset purchases. In other balance sheet news, he European Central Bank (ECB) did not draw on its currency swap line this week. The line has only been lightly used, but this marks the first week since May of last year that the ECB has not conducted any swap operations. Other trends have continued, with asset purchases up $53 billion, excess reserves up $91 billion, and the Supplemental Financing Account down $50 billion.
- There were a few minor moves over the previous two weeks that continued recent trends. Maiden Lane I and Maiden Lane III each made a payment on their outstanding loan from the New York Fed. Currently, the balance on the loan to Maiden Lane I is just over $24 billion and the balance for Maiden Lane III is down to $12.4 billion. The Supplemental Financing Account fell another $50 billion, leaving the account near $125 billion. The Treasury General Account has fallen from its year-end peak, down about $41 billion in the past two weeks. Also, a total of $5.07 billion of Term Deposits are on the balance sheet this week after the auction on February 3. Overall, there has been a downward trend in the factors that absorb reserves. Asset purchases have also continued, adding an additional $48 billion to the balance sheet over recent weeks. Excess reserves have grown as a result of the decline in factors that absorb reserves and the increase in purchases, leaving the balance of excess reserves at nearly $1.2 trillion.
- The New York Fed added another 32 money market funds to the counterparty list for reverse repurchase agreement operations. The new additions come from 19 different investment managers, some of whom already had money market funds on the list. No operations were conducted. The Term Deposit Facility conducted a $5 billion auction of 28-day deposits. The values are not in this week’s numbers, but results have been posted showing a stop-out rate of 0.26 percent and a bid-to-cover ratio of 2.52. A total of $5.01 billion of deposits were issued. Quarterly revaluations of the three Maiden Lanes were estimated since the last balance sheet update. All three portfolios saw modest increases, with the largest jump being a $500 million addition to Maiden Lane III. After the Treasury announcement about the need to reduce the balance of the Supplemental Financing Account, the amount held at the Fed has fallen $25 billion. As a result of the SFA decline and the additional asset purchases, the balance of excess reserves has climbed $50 billion over the past two weeks. Also, the balance of securities lent to dealers and the Treasury’s General Account remained at above normal levels.
- American International Group (AIG) executed its exit plan from Federal Reserve assistance during the previous two weeks. The $19.9 billion balance for the revolving credit facility open to AIG was completely repaid by using funds that AIG acquired in the sale of a set of its subsidiaries. Extra cash from those sales (about $6 billion) went toward repurchasing the preferred interests that the Fed held in AIA Group and American Life Insurance Company. The remaining balance of those preferred interests ($19 billion) was bought by AIG using Troubled Asset Relief Program money. The entirety of the preferred interests was transferred to the Treasury by AIG. At this point, the only aid to AIG remaining on the Fed’s balance sheet is Maiden Lane II and Maiden Lane III, both of which do not contain any direct exposure to AIG. Also, Maiden Lane III made a larger-than-usual payment on its loan from the New York Fed, dropping the balance of the loan below $13 billion. The amount of securities lent to dealers remained elevated (around $13.5 billion), nearly $10 billion above the 2010 average. This may be a new norm given the expanding balance of security holdings on the balance sheet. The Treasury announced that they are going to gradually lower the balance in the Supplemental Financing Account (SFA) because of recent estimates that show that the United States will hit its legal debt limit by the end of March. Securities issued for the SFA are 56-day securities, so to lower the balance in the account, the Treasury plans to stop rolling over the securities. Also, the Treasury General Account spiked again. This type of spike is not unfamiliar for a January, and looks similar to January 2010, but it will be interesting to see how this account reacts to the decline in the SFA. When the SFA was reduced due to an approaching debt ceiling in October 2009, the General Account experienced elevated balances.
- There were seasonal jumps and subsequent declines in several categories over the past two weeks. Most notably, securities lent to dealers doubled its total from about $10 million to $20 million, and fell back to $12 million this past week. Also, the value of the Treasury General Account rose to help cope with end-of-year tax activity, growing from $30 billion to top $100 billion before starting to ebb this week. The total holdings of Treasury securities topped $1 trillion recently, while the total holdings of agency mortgage-backed securities dropped under $1 trillion for the first time since February 2010. The Treasury purchase schedule for mid-January to mid-February was released this week, with $112 billion of purchases expected to be made. Purchases will be split into $32 billion of reinvestment of matured agency debt and mortgage-backed securities and $80 billion of large-scale asset purchases. Maiden Lane II made a payment on the outstanding balance of its loan this week. The balance of the loan now stands at just under $12.8 billion. This is the first time since early 2009 that Maiden Lane III and Maiden Lane II did not make payments on their loans in the same week. Maiden Lane III has not made a payment on its loan in over a month and a half.
- There was very little balance sheet activity leading into the holidays. Of note, the European Central Bank increased its drawings on its currency swap line, drawing $75 million in each of the past two weeks. This was a $15 million increase from the previous four weeks. The Federal Reserve Bank of New York extended the ECB’s currency swap line, along with those for the Bank of Canada, the Bank of England, the Bank of Japan, and the Swiss National Bank, through August 1, 2011. All five swap lines were set to expire February 1, 2011. According to our calculations, another milestone was reached in the second round of large-scale asset purchases. After purchases this week, the total amount purchased for the program rose over $100 billion. Also, the value of the Treasury General Account has been rising over the past two weeks to help cope with end-of-year tax activity. That account has grown from $30 billion to $90 billion.
- Borrowing at the discount window has now jumped up to $218 million. While still an insignificant amount, this is the most discount window lending seen since June. Unofficial counts for the two Treasury purchasing programs, the reinvestment program for maturing agency debt and agency mortgage-backed securities and the second round of large-scale purchases, are climbing after November’s Federal Open Market Committee meeting. Current estimates have the total amount of reinvestment since August at around $135 billion and the total amount of large-scale purchases at around $44 billion. There was also another $5 billion Term Deposit auction that settled after the data were released. The bid-to-cover ratio was nearly 3 and the stop-out rate was 26 basis points. In accordance with the Dodd-Frank Act, data for several emergency lending and purchasing programs were released on December 1. The data cover transactions from December 1, 2007, to July 21, 2010.
A couple of things have occurred over the past two weeks that have impacted the Fed’s balance sheet. First, there are more signs that the situation in Ireland may be straining the European financial system, as the European Central Bank drew an extra $5 million in dollar liquidity on their currency swap line this week, bumping their drawing to $65 million. The terms were similar to recent draws, 6 days at a rate of 1.19 percent. The amount drawn may rise in upcoming weeks as the Irish government works with a number of agencies to discuss the possibility of a bailout.
Second, Treasury holdings in the System Open-Market Account jumped by over $28 billion in the past two weeks, as the first purchases for the Federal Reserve’s intermediate-term Treasury purchase program have gotten under way. These purchases are being made jointly with the Treasury reinvestment program announced in August. The reinvestment strategy had held the holdings relatively stable through the beginning of November, and the new round of Treasury purchases has started to inch the portfolio upward. On another note, Maiden Lane made its scheduled monthly repayment, lowering its outstanding balance to just under $26 billion.
All three of the Maiden Lane portfolios were revalued last week according to third-quarter fair market values for the securities in the portfolios. Maiden Lane I jumped from $27.95 billion to $28.47. Maiden Lane II jumped from $15.68 billion to $16.47 billion, and Maiden Lane III grew from $22.84 to $23.53. All three of the portfolios still have a net value above the amount of the outstanding loan from the Federal Reserve Bank of New York. Central bank liquidity swap operations by the European Central Bank fell back to their previous trend of $60 million during the past two weeks, after a jump up to $560 million three weeks ago. Also, the amount of reverse repos doubled last week as more preparatory operations were conducted, with the balance jumping to $1.6 billion before falling back to zero this week.
There were two important changes to the balance sheet recently that did not involve a major shift in the data. First, the Federal Open Market Committee announced the start of a Treasury securities purchase program of $600 billion that will inflate the size of the balance sheet. The purchases, coined quantitative easing II, will be conducted in conjunction with the agency debt and mortgage-backed securities reinvestment strategy, with estimates of total purchases near $850-$900 billion by the end of the first quarter of 2011. An initial operation took place November 4, but it is not included in this week’s data. The purchase came in the amount of $4.765 billion and was weighted entirely in 4-6 year securities.
Also, a new line has been added to the balance sheet this week. American International Group (AIG) has recently completed the sale of its American Life Insurance Company unit to MetLife and the initial public offering of its Asian life insurance unit, AIA Group Limited. The sale and IPO drew over $27 billion in cash and another $9 billion in MetLife shares. The cash will eventually go toward repaying AIG’s credit facility and the New York Fed for its preferred shares in the two units, but until the plan is closed (expected by the first quarter of 2011), the cash proceeds will be held by the New York Fed as agent. The holdings currently total $18.85 billion.
Maiden Lane I made a monthly payment of over $600 million on its loan from the New York Fed this week, bringing the outstanding balance down to just under $27 billion. After six weeks of drawing $60 million of 7-day swaps, the European Central Bank (ECB) upped the ante this week on its liquidity swap line. The ECB drew $560 million of 7-day swaps this week, the largest amount outstanding for the bank since early August. Nearly $14 billion of agency debt and mortgage-backed securities (MBS) left the balance sheet over the past two weeks, all of which was replaced by Treasury securities. Up to this point, the New York Fed has purchased nearly $60 billion of Treasury securities since the August Federal Open Market Committee meeting statement announced the initiation of the Fed’s Treasury reinvestment program. The New York Fed has also conducted a series of five reverse repurchase agreement operations as per its October 12 announcement. The operations totaled $889 million and have used Treasury securities, agency debt, and agency MBS as collateral.
The European Central Bank rolled over its swap operations in both of the past two weeks—the sixth and seventh consecutive weeks that it has drawn dollar liquidity. Both operations were for $60 million at a rate of 1.18 percent. In the Treasury General Account, the balance remained close to $58 billion, nearly three times as high as right before the end of the third quarter. The Federal Reserve Board announced and conducted a fourth Term Deposit auction, which took place on Monday October 4. The $5 billion auction was for 28-day deposits. Results from the operation showed that the stop-out rate was just under 27 basis points and that the bid-to-cover ratio was 2.72. This operation was still part of the announced small-scale operations that were to be conducted in preparation of larger-scale operations.
The outstanding loan balances for Maiden Lane II and III were reduced this week, with Maiden Lane II falling $200 million and Maiden Lane III dropping $350 million. Their balances now stand at $13.5 billion for Maiden Lane II and $14.3 billion for Maiden Lane III, even though the estimated value of the portfolio holdings is $15.7 for Maiden Lane II and $22.8 for Maiden Lane III. These transactions follow last week?s announcement from AIG that it had constructed a plan to exit from government assistance. Discount Window lending to primary dealers spiked this past week to $89 million. While the amount is tiny compared to the total balance sheet, it is the highest level seen since June of this year.
- Another big chunk of the first Maiden Lane transaction got repaid this week, dropping the outstanding balance of the loan from $28.3 billion to $27.6 billion. Maiden Lane I only recently went into repayment following a two-year grace period after the loan was made. The European Central Bank (ECB) drew $60 million of swaps through the central bank liquidity swap program each of the past two weeks. This marks the fourth and fifth consecutive weeks that the ECB has drawn 7-day swaps. Agency debt and agency mortgage-backed securities continue to decline at a steady pace, having dropped by about $30 billion since the August meeting and over $10 billion in the last week alone. The Fed’s portfolio of Treasury securities has risen by $30 billion as well. For the first time since October 2009, the total amount of excess reserves on the Fed’s balance sheet has dropped below $1 trillion. Also, the Treasury’s general account at the Fed spiked this week, with the approach of the end of the third quarter, jumping from $22 billion to $77 billion. This rise in the general account, which typically collects the outflows of deposits from depository institutions, may help to explain the drop in excess reserves.
- There are a few things to catch up on with the balance sheet this week, but all of them should be fairly familiar by now. Maiden Lane II and Maiden Lane III each made scheduled payments on their loans from the New York Fed this week, dropping the outstanding balances by $200 million and $500 million, respectively. Also, after drawing $35 million in 7-day swaps two weeks ago, the ECB took an $40 million and $60 million in 7-day swaps last week and this week. The terms of the most recent operations were similar to the first, drawing at a rate of close to 1.2 percent. These extra draws may be precautionary following the continued widen in European CDS spreads. Spreads on Greek, Irish and Spanish debt are now atop or near crisis peaks. The Fed’s portfolio of Treasury securities has continued to grow these past couple of weeks, now up to $337 billion. Over the past two weeks, $6.6 billion in securities were purchased, and details of the Treasury operations can be found on the New York Fed website. Possibly of note as well, it appears excess reserves have finally leveled off. They have teetered near $1 trillion for almost all of 2010, a drastic difference from movements seen since September 2008.
- Over the past two weeks, Maiden Lane I made a scheduled payment on its loan from the New York Fed of nearly $500 million, dropping the net holdings and the outstanding balance to $29 billion and $28.3 billion, respectively. Also, as the remaining central bank liquidity swaps were set to expire within this most recent period, the European Central Bank has drawn extra dollar liquidity through two swap operations. The terms were for seven-day swaps both weeks at a rate nearly 1.18 percent. As had been announced in the Federal Open Market Committee (FOMC) statement, the Fed will use proceeds from its agency debt and agency mortgage-backed security (MBS) holdings and reinvest them in Treasury securities. There were two operations each of the past two weeks, and the results can be seen on the New York Fed’s website. Thus far in the program, there have been nearly $10 billion in Treasury purchases to make up for a similar decline in the holdings of agency debt and MBS. AIG has paid back an extra sum of the outstanding balance on its revolving credit facility. AIG’s aircraft leasing company, International Lease Finance Corporation, sold more than $4.4 billion in debt, and AIG used $3.9 billion of the proceeds to repay the New York Fed. The balance fell from $23.5 billion to about $19.4 billion. The small-scale operations designed for reverse repurchase agreements (reverse repos) were completed this week, dropping the outstanding balance back to zero. A statement from the New York Fed was released during these small-scale operations, defining the money market mutual funds that had been accepted as counterparties for reverse repos.
- Maiden Lane II and Maiden Lane III each repaid a portion of their loan from the New York Fed this week. The outstanding balance on the loan to Maiden Lane II was reduced to $13.87 billion and the balance for Maiden Lane III dropped to $15.11 billion. Following the Federal Open Market Committee (FOMC) statement on Tuesday, the New York Fed released a tentative schedule for Treasury purchase operations, which extends through mid-September. Looking at the balance sheet release, $2.88 billion in agency debt is expected to mature within the next 15 days. Another $6.82 billion will mature by early November, but to put the totals in perspective, there will be $19.07 billion in Treasuries maturing within 15 days and another $13.04 billion by early November. Also, as outlined in a statement made by the New York Fed, reverse repurchase agreements were conducted with primary dealers using agency mortgage-backed securities (MBS) over the past week. The operations were done as a matter of prudent planning and on a small scale, totaling only $231 million.
- The outstanding balance on the revolving credit facility that was extended to AIG fell to a six-month low this week. After peaking above $27 billion in early May, the balance dropped to below $24 billion for the first time since late in January. Revaluations also came in for all three Maiden Lane portfolios. Net holdings for each of the three portfolios rose during the second quarter, with all of the increases above $500 million each. Maiden Lane I saw the largest adjustment, netting a rise of nearly $900 million. Slightly more mild bumps of about $600 million were added to Maiden Lane II and III. More generally, overall lending from the Federal Reserve has been falling steadily since the start of 2010, while asset holdings have risen at a gradual pace. Currently, there is little to report on about the liabilities of the Fed.
- This week’s data release had a few interesting changes to note. First, Maiden Lane I started to repay the New York Fed for the loan that it was extended on July 15, 2008. According to the contract, the loan was set to begin being repaid two years after the loan was made. Second, Japan drew an extra $1 million from their central bank liquidity swap line this week. The draw was for an 84-day term at a rate of 1.21 percent. Third, as the New York Fed works to settle all of the mortgage-backed security (MBS) purchases that were supposed to have been completed by the end of March, the trend in the agency debt purchases has been a steady decline since the program’s expiration. The balance of those purchases (which peaked at $175 billion) has now fallen below $160 billion. In terms of settling the MBS purchases, there were no coupon swap or dollar roll operations this week. As for the liabilities, there was a $33 billion jump in the Treasury’s general account this week. Also, the results of the third TDF small-scale operation were accounted for in the balance sheet, bringing the total balance to $4.2 billion.
- There were very limited changes to the Fed’s balance sheet this week. The total balance has steadied between $2.3 trillion and $2.4 trillion since early in 2010 and seems to be holding near $2.37 trillion in the past few months. One minor trend of note has been the steady decline in the outstanding balance in AIG’s revolving credit facility with the Fed since the beginning of June. A relatively small decline of $2 billion has occurred over the most recent month and a half, but the trend could be signaling a return of creditworthiness to AIG. Since mid-March, the outstanding balance of the Term Asset-Backed Securities Loan Facility has also declined incrementally, falling from $48 billion to $42 billion. All of this is a sign that nontraditional lending is winding down as the recovery continues. Another $650 million in coupon swap operations were conducted this week, fulfilling the target amount of coupon swaps totaling $9.2 billion over the past three weeks. All major liabilities categories remained relatively stable.
- The loans extended to Maiden Lane II and III were repaid according to their monthly schedules this week. On the outstanding loan to Maiden Lane II, $220 million was returned to the New York Fed, bringing the total left to be repaid down to $14.089 billion. Maiden Lane III saw a fall of nearly $400 million, dropping the balance remaining to $15.469 billion. The mortgage-backed security (MBS) coupon swap operations announced last week by the New York Fed continued this week, racking up an extra $6 billion. Other assets have continued along their trends. Discount Window lending was cut to a third of its previous size, falling to $111 million left outstanding. Security holdings from the large-scale asset purchase programs seem to have topped out in the range of $1.6 trillion. There was no significant action on the other side of the balance sheet. The third and final scheduled small-scale Term Deposit auction is set for next Monday.
- A second small-scale Term Deposit operation took place this week, and it was met with more strong demand. Over $11 billion of bids were entered for just $2 billion worth of deposits, making the stop out rate equal to that of the first auction (27 basis points). The end of the month marked the end of a reserve maintenance period and the end of a quarter, but there were only minor adjustments made to both currency and reserves. Assets remained steady this week, with more adjustments toward normalcy taking place. Discount Window lending declined, credit extended to AIG was repaid and there were no new draws on the central bank liquidity swap lines. Early in the week, the New York Fed announced that it would begin conducting agency mortgage-backed-security (MBS) coupon swap operations to help settle the Fed’s agency MBS purchases that concluded at the end of March. According to the press release, these operations will be used in conjunction with MBS dollar roll operations and are not expected to exceed the unsettled amount of $9.2 billion in Fannie Mae coupon securities. The most recent balance sheet release reported that $2.5 billion of these types of operations had already occurred.
- The FOMC statement from this week gave very little hope that the composition or the size of the Fed’s balance sheet would be changing anytime soon. Weak economic data and low inflation trends and expectations suggest that the Fed will likely be content to leave its accommodative monetary policy on the balance sheet for a while longer. In preparing for the transition, however, the H.4.1 data release has added a weekly update on the status of Term Deposits outstanding from the Fed’s new Term Deposit facility. This facility adds another dimension to the Fed’s reserve draining powers, all which may be used in tandem with interest on reserve rate hikes or asset sales. There were no major changes on the holdings side of the balance sheet, but a minor action was another $3 million drawing by Japan through the central bank liquidity swap lines.
- As the Federal Reserve continues to prepare for its eventual exit from an accommodative monetary policy stance, it has worked to ready its Term Deposit Facility. Early this week, the facility was tested with a small-scale ($1 billion) auction operation of two-week term deposits. The auction was met with great demand, drawing a bid-to-cover ratio of over 6. Testing will continue through the summer, as the Fed works to cope with the elevated level of excess reserves remaining from the financial crisis. Other aspects of the balance sheet were largely unchanged this week, as the recently reestablished central bank liquidity swap lines were untapped. Small adjustments were made as some agency mortgage-backed securities purchases were cleared and TALF loans were prepaid.
- This week, the outstanding balances in Maiden Lane II and III were paid down according to their monthly schedules. Currently, the outstanding loans to the two facilities are $14.3 billion for Maiden Lane II and $15.8 billion Maiden Lane III. For the liquidity swap lines, there were no new draws this week, leaving only about $1.2 billion outstanding. The majority of the outstanding balance ($1 billion) is extended to the European Central Bank. Mortgage-backed securities dollar rolls continued their comeback, climbing up to $8.35 billion. Changes on the liabilities side of the balance sheet were very small.
- Total Discount Window lending dropped by $3.7 billion this week, falling to just over $1 billion outstanding. Other types of lending also continued their decline. Lending that had been extended to more specific markets, often referred to as “nontraditional” lending, is now almost exclusively made up of the outstanding balance for the Term Asset-Backed Securities Loan Facility (TALF). Facilities outside of TALF that are considered nontraditional have been allowed to expire, and all but $1 billion of their outstanding balances have matured. The 3- to 5-year maturity of the TALF loans, however, will force the balance of that facility to decline more slowly. There was a jump in the central bank liquidity swap lines this week after the European Central Bank took out an extra $5.4 billion in 7-day operations. On the liabilities side, following the end of a reserve maintenance period this week, excess reserves remained fairly stable. There was a relatively small $7 billion drop in excess reserves, which was offset by a jump in the Treasury general account by a similar amount.
- After climbing to what would seem a more appropriate level last week, the central bank liquidity swap lines fell from $9.2 billion to $1.2 billion. What is more interesting is that the amounts drawn this week were for three-month swaps with both the Bank of Japan and the European Central Bank. It appears as if there is no urgent need for dollar funding abroad. Of note in domestic markets is the fact that Discount Window lending has fallen for the twentieth consecutive week, which includes every week in 2010. This reduction in activity at the Discount Window signals a shift back into private market borrowing for some of the most troubled institutions in the financial crisis. Total outstanding Discount Window loans now stands just below $5 billion. There were no remarkable shifts in Federal Reserve liabilities this week due to the release being issued in the middle of a reserve maintenance period.
- The central bank liquidity swaps took effect this week. Only the European Central Bank had an outstanding balance as of May 12 and it was already up to $9.2 billion. Expectations are for the outstanding balances on the swap lines to remain well below the previous peaks seen a little more than a year ago. The swap lines are scheduled to be available through January 2011. Balances in the Commercial Paper Funding Facility have all but rolled off, falling $2.8 billion to just $2 million this week. Also, the special purpose vehicles Maiden Lane II and III repaid a portion of their loans from the New York Fed, following their monthly repayment schedule. The outstanding balances on those loans are now $14.5 billion for Maiden Lane II and $16.2 billion for Maiden Lane III. On the liabilities side, it seems as if the wave of tax receipts has subsided, with the Treasury general account dropping nearly $42 billion this week.
- One of the biggest concerns for the balance sheet this week did not appear on the statistical release. A British regulator, the Financial Services Authority (FSA), raised concerns over Prudential’s capital capacity to purchase AIG’s Asian subsidiary AIA, now leaving the deal in doubt. If the deal were to go through, the estimated $35.5 billion price for AIA would go toward repaying the loans that AIG had taken out from the Federal Reserve. Currently, the Fed holds $16.2 billion in preferred interests in AIA, which could be recovered in the event of a sale, as well as an extra $27 billion in outstanding loans to AIG. AIG drew an extra $1.3 billion from its revolving credit facility at the Fed, the second week in a row that the outstanding balance has increased by close to $1 billion. Last week’s report was that the increase was due to adjustments made to the terms of the credit facility. Elsewhere on the balance sheet, the CPFF dropped nearly $4 billion, as more of the remaining outstanding commercial paper in the facility has rolled off. The balance for the CPFF now stands at $2.8 billion. On the liabilities side, excess reserves fell again this week, this time by about $46 billion, but were offset by a $20 billion jump in the Treasury’s general account.
- Quarter-end revisions were made to some assets held by the Fed this week. All of the Maiden Lane portfolios were revalued according to market conditions (measuring how much the portfolios could receive if they were sold today), and each gained in their net portfolio holdings. Maiden Lane I, made up of Bear Stearns assets, climbed $700 million to $28.2 billion. Residential mortgage-backed securities from AIG in Maiden Lane II grew from $15.2 billion to $16.1 billion through the first quarter of 2010. Also from AIG, the collateralized debt obligations held in Maiden Lane III were revalued with an extra $1.5 billion. Restructuring for the credit extended to AIG was factored into the outstanding balance reported on the balance sheet this week, adding almost $1 billion to AIG’s tab. A revaluation of the loans made through TALF took place as well, knocking $1.4 billion off of the outstanding balance. On the liabilities side, the Treasury’s General Account increased by nearly $12 billion, most likely due to the continuation of inflows from tax returns.
- There was little change in the asset side of the balance sheet this week. At the end of March, the Large Scale Asset Purchase programs expired and most potential inflows into the balance have now passed. There is still room for mild growth as some of the final purchases are processed and cleared. All lending to financial institutions and credit markets declined only slightly throughout the week. Most changes in the balance sheet this week occurred as the composition of the liabilities shifted. Notably, excess reserves retreated by almost $50 billion. This drop can be attributed to two dramatic increases in Treasury accounts. The Treasury’s general account at the Fed, which could be expanding with the receipt of tax payments, grew by about $30 billion. The other jump occurred in the Treasury’s Supplemental Financing Program (SFP) account, as the final $25 billion auction of SFP Treasury securities was recorded. As the debate on how to exit from the Fed’s balance sheet expansion heats up, these Treasury accounts may be an unpredictable but helpful source of reserve draining.