The Federal Reserve’s balance sheet edged lower last week as reserve balances fell and mortgage backed securities continued to run off.

Reserve Bank credit declined by $2.5 billion to $6.665 trillion for the week ended June 3, according to the Fed’s H.4.1 release published June 4. Reserve balances held at Federal Reserve Banks dropped by $52.7 billion to $3.014 trillion.

Securities held outright, the Fed’s largest balance sheet asset, fell by $1.3 billion to $6.436 trillion. Mortgage backed securities declined by $9.2 billion, while Treasury holdings rose by $7.9 billion, partly offsetting the drop.

The weekly move was modest, and the longer term picture is less restrictive. Reserve Bank credit was still up $38.4 billion from the same week a year earlier, while securities held outright were up $64.6 billion.

The Fed ended its balance sheet runoff on Dec. 1 after signs of tighter money market liquidity and falling bank reserves. The central bank stopped allowing Treasury securities to mature without replacement and began rolling over maturing Treasuries. It also kept allowing mortgage backed securities to mature, while reinvesting those proceeds into Treasury bills.

Since then, the Fed has moved into reserve management mode. Policymakers have said reserve management purchases are meant to maintain interest rate control and smooth market functioning, not to signal a change in monetary policy.

For markets, the message is mixed. The Fed is no longer running quantitative tightening through Treasury runoff, but it is still letting mortgage backed securities leave the balance sheet. 

At the same time, reserve balances remain large enough for the Fed’s ample reserves framework, even if they can fluctuate sharply week to week.

For crypto and other risk assets, this is not a return to easy liquidity. The balance sheet is no longer shrinking aggressively, but the system is still operating in a world where liquidity is managed rather than unlimited.