"Quantitative Tightening" and the U.S. Banking System
The Federal Reserve's asset portfolio has shrunk by roughly $500 billion since last summer. The impact has not been distributed evenly.
The Federal Reserve pivoted to monetary tightening in November-December 2021, even if did not begin raising short-term interest rates until March 2022 or start running down its bond portfolio until June 2022. November-December 2021 was when U.S. bond yields bottomed and when stock prices peaked.1
The end of 2021 was also when the quantity of reserves held by banks on deposit at the Fed began to shrink from the pandemic-era peak of ~$4.3 trillion. As of this writing, reserves are about $1.2 trillion (30%) lower now than then. About $1 trillion of this decline had occurred by the end of May 2022—before the Fed started shrinking its balance sheet.
Intriguingly, the quantity of bank reserves stopped falling around the end of September 2022—right around when bond yields began to fall from their recent peaks and when stock prices began to rise off the lows.
What happened, and what has changed since last summer?