Fed Balance Sheet Shrinks 0.8% for First Decline in Eight Weeks

By Scott Lanman


Oct. 1 (Bloomberg) -- The Federal Reserve’s balance sheet contracted for the first time in eight weeks as lending to banks in the U.S. and abroad declined.

The Fed’s assets shrank $17.6 billion, or 0.8 percent, to $2.14 trillion in the week ended yesterday, the central bank said today in Washington. Credit extended through the Term Auction Facility, which sells cash loans to commercial banks, fell $17.6 billion to $178.4 billion. Currency swaps to central banks outside the U.S. slipped $2.37 billion to $56.8 billion.

While the Fed is completing purchases of housing debt and Treasuries, demand for some of the Fed’s emergency liquidity programs has waned. Fed Vice Chairman Donald Kohn said yesterday that when conditions are no longer “unusual and exigent,” some emergency lending programs “will be terminated.”

Mortgage-backed securities declined by $1.23 billion to $692.4 billion and Treasury-bond holdings increased $3.53 billion to $769.2 billion. Federal agency debt gained $1.97 billion to $131.2 billion.

Fed Chairman Ben S. Bernanke and his colleagues are trying to balance two goals: securing an economic recovery after the deepest contraction and financial crisis since the Great Depression while withdrawing fiscal and monetary stimulus in time to avoid driving inflation and borrowing costs higher.

The Fed said Sept. 24 it will further shrink auctions of cash loans to banks and Treasury securities to bond dealers, reducing the combined initiatives to $100 billion by January from $450 billion. The central bank cited “continued improvements” in financial markets.

Policy makers said Sept. 23 they will complete the Fed’s planned $1.25 trillion in purchases of mortgage securities and extended the end-date of the program to March from December. They kept the benchmark interest rate in a range of zero to 0.25 percent and repeated that rates will stay low for an “extended period.”

The Fed is reducing the TAF’s capacity to $75 billion in January from $375 billion in September.

Discount-window lending to commercial banks fell to $28.2 billion from $28.5 billion the previous week. The face value of commercial paper held by the Fed under an emergency program begun last October shrank to $36.8 billion from $38 billion on Sept. 23.

M2 money supply fell by $8 billion in the week ended Sept. 21, the Fed said. That left M2 growing at an annual rate of 7.8 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

For the latest reporting week, M1 fell by $31.1 billion, and over the past 52 weeks, M1 rose 17.5 percent. The Fed no longer publishes figures for M3.