Fed’s balance sheet sees largest weekly drop in over 11 years

The US Federal Reserve’s (Fed) balance sheet size declined by about $88 billion to $6.97 trillion in the week ended July 8, versus $7.06 trillion a week earlier, official data released Thursday showed. 

The largest weekly decline in more than 11 years was fueled by the drop in the balance of outstanding repurchase agreements or repos, an emergency liquidity tool, to zero from $61.2 billion a week earlier, according to a Reuters report. 

For the first time in 10 months, banks have not availed of the repo facility. The Fed began intervening in the repo market in mid-September 2019 after a decline in bank reserves caused a record surge in the short-term borrowing costs. The central bank ramped up repo operations in March to unprecedented levels in a bid to help financial markets absorb shocks arising from the coronavirus crisis. 

The decline in the Fed’s balance sheet size could weigh over the US equity markets. The S&P 500 has rallied by nearly 45% over the past 3.5-months, largely on the back of the Fed’s massive liquidity injections.