Federal Reserve Rolls $2.7 B Off Balance Sheet

The Federal Reserve reduced its balance sheet by $2.7 billion last week, all of it MBS. The Fed has two weeks left in September (the second week ends on October 3). On September 30, $19 billion in treasuries will mature, but the Fed is scheduled to reduce $24 billion this month and because of a slower pace in July and August, it actually should reduce by $27 billion. Either $5 to $7 billion in treasuries will be sold next week or there's going to be a monster reduction in the final week of September. All together, the Fed has $34 billion left this month.

On a percentage basis, the Fed is set to reduce its balance sheet by 0.8 percent over the next two weeks. It reduced by similar amounts 3 times this years, twice across two weeks and once over three.

The first was the last two weeks of February. The S&P 500 gained for this whole period, even though it fell on February 27 and 28.

The second major reduction period came in late June and into early July. Again, the S&P 500 Index rose, but it was a bumpy ride.

The last period was the last two weeks of July. I included the next two weeks because the week ending August 15 saw the largest single-week reduction in percentage terms at 0.68 percent.

If you're bullish on the market, then you can expect prices will be higher following the next couple of weeks. If you have shorter time frames, the couple of days heading into September 30 could be a shorting opportunity.