QT/QE Pace

Think of it this way

It is the actual flow through the main pipe, measured in liters per minute. The headlines tell you the maximum flow the Fed allowed itself; this tells you how much water is really getting through.

What is QT/QE Pace?

It measures how fast the Federal Reserve is creating or destroying money through its bond portfolio. The data is published once a week, and each point compares the size of the portfolio with its size four weeks earlier. The window is four weeks rather than one because the FOMC sets its runoff caps by month: measuring roughly a month is what makes it comparable with what the committee itself announces. Above zero the portfolio grew and that money was created; below zero it shrank and the money was destroyed. But growing is not the same as doing QE. The Fed also buys short-term debt for a purely technical reason: so that bank reserves do not become scarce while currency in circulation and the Treasury account grow. That is maintenance, not stimulus. QE buys long maturities to make credit cheaper across the whole economy; maintenance buys bills. That is why the chart has a third bar, in gray, showing the part of the growth that is bills.

How to read QT/QE Pace

The value tells you how many billion the Fed's portfolio grew or shrank over the LAST FOUR WEEKS, not the last one. Above zero it is buying and creating money; below zero, letting bonds mature and destroying it. To judge whether the pace is strong, you have to compare it with the cap announced by the FOMC. That cap is the maximum amount of its own debt the Fed allows to mature each month without replacing it; anything maturing above that figure is reinvested in other bonds. That is why the actual runoff can never exceed the cap, and if it falls clearly short, it is almost always because little matured that month, not because the Fed changed its plan. The gray bar is what separates the two things. When it explains all the growth, the Fed is replenishing reserves; when the total bar sticks out above it, the difference is in long maturities, and that is stimulus. The history separates the episodes unambiguously: the first QE moved 298 billion in long-term debt and zero bills, the COVID one 1,528 billion in long-term debt, and the 2019 episode that the Fed insisted was not QE was 80% bills. There is also a case that is confusing if you do not know it: when the Fed is doing neither QE nor QT but keeping the portfolio unchanged, the line does not stay flat at zero; it oscillates a few billion up and down and changes color almost every week. That is not policy; it is the gap between the day a bond matures and the day the purchase replacing it settles. Between 2015 and 2017, with the portfolio pinned between 4,200 and 4,241 billion, that oscillation never exceeded 29 billion in either direction and its median was 4: if the bars are small and alternate, the Fed is standing still. Lag: none: money is created or destroyed on the same day.

What QT/QE Pace means for the market

It is the real thermometer of balance sheet policy, without relying on statements. The big QE cycles coincided with the largest rallies in risk assets and the QT cycles with tougher markets, although the relationship is neither mechanical nor immediate.

Where the money flows

WHEN IT BUYS (QE). The Fed does not buy bonds from the Treasury: it is prohibited from taking part in its auctions. It buys them already issued, in the market, from the primary dealers, the two dozen or so banks and securities firms authorized to trade with it. Example: the Fed buys 10 billion in bonds from one of those dealers. To pay, it does not use money it had stored away; it creates it at that moment: it credits 10 billion of new money to the reserve account that the dealer's bank holds at the Fed itself. The dealer delivers the bonds and its bank ends the day with 10 billion more than it had in the morning, money that did not exist before. WHEN IT SHRINKS (QT). Here the Fed does not sell anything to anyone; it simply stops replacing what matures. Example: one of its 10-billion bonds reaches its maturity date. The Treasury has to repay the principal and pays it from the account it holds at the Fed. That money does not reach any bank: it disappears from the Fed's balance sheet just as it appeared the day it was created. And there is a second step, the one that is really felt: 10 billion has just left the Treasury's account, so to replenish it the Treasury sells new debt in the market, and that debt is paid for by banks, funds and insurers from their accounts. That is where the money leaves the banking system.

What to watch in QT/QE Pace

There are two things to watch, and both are on this same line. The first is the PACE when it spikes: a rapid climb warns of a massive injection of new money before it shows up in any other indicator. In March 2020 the series went from +60 billion to +1,342 in five weeks, almost seven times the previous record, the +201 of the first QE in 2009; anyone watching here saw the regime change as it was happening. The second is the ZERO CROSSING coming from negative territory: that is where QT ends and the wind stops blowing against you. To gauge whether a stretch is strong: on the purchase side, 55 billion in four weeks is normal and above 129 you are in the most intense 10%; on the reduction side, counting only from 2018, when the first real QT began, 36 is typical, above 77 you are in the most aggressive 10%, and the largest ever seen is 99. The portfolio peaked at 8,423 billion in April 2022, and that is the reference against which to measure how much has been withdrawn.

Positive = the Fed is creating money. Negative = it is destroying it.