Original title: Let's take a look at the Fed's balance sheet. It's almost double what it was at the end of 2019...

Source: FX168

Right now, the Fed's balance sheet is rapidly expanding. As the early interest rate hike is torn apart, the market is paying attention to the timing and scale of the reduction.

The Federal Reserve acknowledged inflationary pressure last month, but believed it was a temporary factor due to the reopening of the economy.

However, the central bank raised the possibility of raising short-term interest rates by the end of 2022 or the beginning of 2023. So now is a good time to watch the Federal Reserve's substantially expanded balance sheet.

Significant increase: Following the outbreak of the COVID-19 pandemic in early 2020, the Federal Reserve accelerated the pace of asset purchases. As of June 30, its balance sheet was $8.1 trillion, almost double the size of $4.2 trillion at the end of 2019.

Appetite for US Treasury bonds: As of June 30, US Treasury bonds held by the Federal Reserve were 5.2 trillion US dollars, compared to 2.3 trillion US dollars at the end of 2019. The growth was mainly driven by long-term government securities — treasury bills and bonds grew from $2 trillion to $4.4 trillion. Over the same period, holdings of mortgage-backed securities increased 65% to $2.3 trillion.

Main holdings: According to data provided by SIFMA, as of the end of the first quarter, the Federal Reserve held about 22% of outstanding treasury bonds. In 2008, that percentage was around 6%.

After implementing various quantitative easing programs during the Great Depression, this ratio was close to 20% in 2014, then declined over the next five years.

Be patient: From 2015 to October 2017, the Fed's assets fell by $25 billion to $4.5 trillion, which is almost negligible, to $3.8 trillion in August 2019.

Meanwhile, 10-year US Treasury yields peaked at more than 3% in 2018, then fell back to the level before debt purchases were reduced. As of July 9, the yield on 10-year treasury bonds was 1.36%.

(The picture above is from SIFMA)