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The numbers: The Federal Reserve’s balance sheet expended to a record $6.72 trillion in the week ended May 6, up from $6.66 trillion in the prior week, the central bank said Thursday.
What happened: Growth in the balance sheet has been slowing at the Fed has tapered the pace of its asset purchases. Its assets grew by $65 billion in the past week, down from growth of $82.8 billion in the prior week. In addition, some of the Fed’s new loan programs are not yet operational.
The central bank’s holding of Treasury bills and notes rose by $48.8 billion in the past week to $4.02 trillion while its holdings of mortgage-backed bonds rose $660 million.
Banks outside the U.S continued to show demand for dollars. Liquidity swaps lending greenbacks to other central banks rose by $5.9 billion to $444.9 billion.
A program to allow banks to get credit using their Paycheck Protection Program loans as collateral rose by $9.7 billion to $29.2 billion.
Other Fed programs, including the Primary Dealer Credit Facility and the Money Market Mutual Fund Liquidity Facility, saw a decline in use over the past week.
Big picture: “We now look for the Fed to extend large-scale quantitative easing through year-end, purchasing an additional $1.3 trillion in Treasury and mortgage-backed securities in the second half. This would bring the total estimated asset purchases to $3.5 trillion. Of this, the Fed purchases of Treasuries are likely be $2.7 trillion, which represents a significant 67% of the $4 trillion in net new marketable Treasury debt issued to fund the ballooning deficit for this calendar year. As such, the Fed balance sheet is now poised to rise to $10.5 trillion by year-end,” said Kathy Bostjancic, director, U.S. macro investor services, at Oxford Economics.
Market reaction: The yield on the 10-year Treasury note TMUBMUSD10Y, 0.638% fell to 0.639 in Thursday trading and the two-year Treasury note TMUBMUSD02Y, 0.129% hit a record low as some traders are betting the Fed will push interest rates negative next year.
