The 3 years of QT will be undone in a few months during the next crisis
This article first appeared on SchiffGold.
The following analysis breaks down the Fed balance sheet in detail. It shows different parts of the balance sheet and how those amounts have changed. It also shows historical interest rate trends.
The Fed has decided to end Quantitative Tightening (QT) on December 1st. In late 2019, the Fed balance sheet got down to $3.75B. It then peaked just below $9T in June 2022 in the wake of Covid. With QT now completing, it will leave the balance sheet at $6.5T. Almost twice as large as pre-Covid and 7x larger than before the Great Financial Crisis.
Anyone wondering why gold has more than doubled over the last 5 years should look no further than the irresponsible Fed, monetizing a large portion of the US debt permanently. The chart below shows the orderly run-off at the Fed and how they have worked to slowly shrink their balance sheet over the last year and a half.
Figure 1: Monthly Change by Instrument
Zooming out to 10 years and grouping the data by year shows the chart below. What you should notice is how quickly the Fed will un-do all the “hard work” in reducing the balance sheet during the next crisis. It took 4 years to reduce the balance sheet about $2.2T. However, in 2020, it took a few months to grow the balance sheet by $3T and 2 years to grow it by $4.5T. This is what will happen in the next crisis because it’s all the Fed knows what to do.
Figure 2: Monthly Change by Instrument
The table below provides more detail on the Fed’s activities and its recent efforts to shrink the balance sheet. With QT coming to an end. the Fed will be taking a $6.5T balance sheet into the next crisis, almost guaranteeing that it will exceed $10T when it goes back to QE.
Balance Sheet Holdings by Period | Change in Balance Sheet by Period | ||||||||
|---|---|---|---|---|---|---|---|---|---|
Category | Current | 1 Week | 1 Month | 1 Year | 3 Years | 1 Week Change | 1 Month Change | 1 Year Change | 3 Year Change |
Treasury Debt | |||||||||
Maturity < 1yr | 697.5 | 697.5 | 688.9 | 740.4 | 1,154.9 | 0.0 | 8.6 | -42.9 | -457.4 |
Maturity 1-5 | 1,409.9 | 1,409.8 | 1,413.4 | 1,499.2 | 1,948.1 | 0.1 | -3.5 | -89.3 | -538.2 |
Maturity 5-10 | 491.1 | 491.0 | 506.8 | 549.0 | 948.9 | 0.1 | -15.7 | -57.9 | -457.8 |
Maturity 10+ | 1,592.7 | 1,592.6 | 1,587.6 | 1,534.5 | 1,464.1 | 0.1 | 5.1 | 58.2 | 128.6 |
Other | |||||||||
MBS | 2,053.7 | 2,069.9 | 2,070.0 | 2,249.0 | 2,658.8 | -16.2 | -16.3 | -195.3 | -605.1 |
Repo Agreements | 14.0 | 0.0 | 10.3 | 0.0 | 0.0 | 14.0 | 3.7 | 14.0 | 14.0 |
Loans | 7.9 | 6.2 | 8.0 | 23.1 | 22.3 | 1.7 | -0.1 | -15.2 | -14.4 |
Other | 285.7 | 288.3 | 302.0 | 310.0 | 387.5 | -2.6 | -16.3 | -24.3 | -101.8 |
Total | |||||||||
All | 6,552.4 | 6,555.3 | 6,587.0 | 6,905.1 | 8,584.6 | -2.9 | -34.6 | -352.7 | -2,032.2 |
The weekly activity can be seen below. As shown, the Repo agreements finally saw some activity in recent weeks. However, according to the Fed, it is not being used as much as they would like to see.
Figure 3: Fed Balance Sheet Weekly Changes
The chart below shows the balance on detailed items in Loans and also Repos. These were the programs set up in the wake of the SVB collapse. All of the programs have dropped down to zero at this point, but as mentioned above, the Fed would like to see more usage of the Repo market (Standard Repo Facility or SRF).
Figure 4: Loan Details
Yields have been fluctuating within a band since Sept 2022, ranging mostly between 3.25% and 4.75%. The range of rates has begun to widen in recent months and the yield curve takes on a more normal shape.
Figure 5: Interest Rates Across Maturities
This normalization of the yield curve can be seen in the chart below. The spread between the 2 year and 10 year continues to move up. This does not mean a recession is no longer likely because the inverted yield curve can work on a significant lag.
Figure 6: Tracking Yield Curve Inversion
The chart below shows the current yield curve, the yield curve one month ago, and one year ago. The long end has moved up while the medium term bonds have stayed pretty flat for a year.
Figure 7: Tracking Yield Curve Inversion
When the Fed makes money, it sends it back to the Treasury. This has netted the Treasury close to $100B a year. This can be seen below.
Figure 8: Fed Payments to Treasury
You may notice in the chart above that 2023-2025 are showing $0. That’s because the Fed has been losing money. According to the Fed: The Federal Reserve Banks remit residual net earnings to the U.S. Treasury after providing for the costs of operations… Positive amounts represent the estimated weekly remittances due to U.S. Treasury. Negative amounts represent the cumulative deferred asset position … deferred asset is the amount of net earnings that the Federal Reserve Banks need to realize before remittances to the U.S. Treasury resume.
Basically, when the Fed makes money, it gives it to the Treasury. When it loses money, it keeps a negative balance by printing the difference. That negative balance has just exceeded $243B! The balance is starting to move back up as interest rates have started to come down.
Figure 9: Remittances or Negative Balance
The Fed has not been buying in the Treasury market since 2022 (they have been selling); however, the Treasury is still issuing tons of new debt. Who has been picking up the slack since the Fed stepped away?
International holdings have increased a decent amount since 2022, rising by $2T. Unfortunately, this pales in comparison to the amount of debt issued by the Treasury overall which is closer to $8.4T.
Note: data is updated on a lag. The latest data is as of September
Figure 10: International Holders
So, who is adding? Not China, they continue to reduce holdings and are now only holding $700B in US Debt. This is down $500B in the last decade. A very orderly reduction. Combine this with the fact that Fed can absorb $1T in a weekend and there should not be any more fear that China can crash the US Treasury market if they wanted to… and honestly why would they? Instead, they have slowly and orderly reduced Treasury holdings and accumulated gold. Smart move!
Other countries have been absorbing the reduction from China. Belgium, the UK, Canada, and Japan have all absorbed close to $100B each over the last year while China reduced by $70B
With the debt ceiling now lifted and an irresponsible White House. It feels very likely debt issuance could increase quite rapidly. The rest of the world cannot absorb all the paper about to flood the market.
Historical International Holders of Debt | |||||||
|---|---|---|---|---|---|---|---|
Month | All Other | Belgium | Canada | China, Mainland | Japan | United Kingdom | Total |
2015-09-01 | 3.46 | 0.14 | 0.07 | 1.26 | 1.18 | 6.10 | |
2016-09-01 | 3.42 | 0.14 | 0.09 | 1.16 | 1.14 | 0.22 | 6.16 |
2017-09-01 | 3.61 | 0.10 | 0.07 | 1.18 | 1.10 | 0.24 | 6.30 |
2018-09-01 | 3.51 | 0.16 | 0.09 | 1.15 | 1.03 | 0.28 | 6.23 |
2019-09-01 | 3.85 | 0.22 | 0.12 | 1.10 | 1.15 | 0.35 | 6.78 |
2020-09-01 | 3.96 | 0.22 | 0.13 | 1.06 | 1.28 | 0.43 | 7.07 |
2021-09-01 | 4.25 | 0.22 | 0.17 | 1.05 | 1.30 | 0.57 | 7.55 |
2022-09-01 | 4.04 | 0.32 | 0.20 | 0.90 | 1.12 | 0.66 | 7.25 |
2023-09-01 | 4.54 | 0.32 | 0.28 | 0.78 | 1.09 | 0.60 | 7.60 |
2024-09-01 | 5.56 | 0.37 | 0.37 | 0.77 | 1.10 | 0.77 | 8.93 |
2025-09-01 | 5.55 | 0.47 | 0.48 | 0.70 | 1.19 | 0.86 | 9.25 |
Data as of: 2025-11-26. Values are in Trillions of dollars. | |||||||
The final plot below takes a larger view of the balance sheet. It is clear to see how the usage of the balance sheet has changed since the Global Financial Crisis. This also highlights the rapid increase and steady decrease. The Fed can never actually shrink its balance sheet back to the previous state, it just does minor reductions when it can before the next crisis blows it up again.
Figure 11: Historical Fed Balance Sheet
The Treasury is issuing ~$2T a year in new debt. When the next crisis hits, this could easily double. Who can continue to soak up so much debt? The Fed. That’s it. They are the last game in town and they will absolutely step in. This is why gold and silver continue to rise. The market has finally figured it out. There is no other way out.