SMM: the Fed's balance sheet shrank for the third consecutive week this week, falling to the smallest size since mid-May.

Overall assets held by the Fed fell by $74 billion to $7.00904 trillion in the most recent week, compared with $7.0823 trillion the previous week, the Fed said today. This is the third consecutive week of decline in the size of the Fed's balance sheet.

The decline in the balance sheet last week was mainly due to a $50 billion reduction in currency swaps between the Federal Reserve and other central banks. That figure has fallen for five consecutive weeks, indicating that the dollar liquidity squeeze in global markets has eased significantly.

The data also show that the Fed's two-week-old main street loan facility, which aims to provide easy loans to small and medium-sized companies that cannot obtain credit from elsewhere, has yet to lend.

Previously, the size of the Fed's balance sheet had grown by leaps and bounds, rising by $3,000bn to $7.2 trillion in just three months.

Since the epidemic began, the Fed has launched a series of emergency lending programs, which dwarfs its response in 2008. Massive purchases of Treasuries and mortgage bonds have boosted the Fed's balance sheet from $4.2 trillion at the end of 2019 to more than $7,000bn. Today, its balance sheet is eight times larger than it was before the Great Depression.

Is the Fed tap off?

Citic Construction Investment Huang Wentao previously commented that the recent continued contraction of the Fed's balance sheet does not mean monetary policy is tightening:

1. Buybacks and swaps are mostly short-term operations, facing the objective pressure of maturity termination, the decline of related assets is more of a passive contraction.

2. To judge the attitude of the Fed in expanding its statement, the focus is on the medium-and long-term purchases of treasury bonds and MBS assets.

Data show that the Fed's holdings of Treasuries reached $4.213 trillion last week, up from $4.197 trillion the previous week. From this point of view, the Fed's monetary policy has continued its previous loose trend.

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