(Bloomberg) — The Federal Reserve said it should start shrinking its balance sheet at a slower pace starting next month, reducing the quantity of bond holdings it lets roll off every month.
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Officials, who left rates of interest unchanged on Wednesday, said they’ll lower the cap starting April 1 on the quantity of Treasuries allowed to mature without being reinvested to $5 billion from $25 billion. The Fed will leave the cap on mortgage-backed securities unchanged at $35 billion.
Chair Jerome Powell said that officials had seen some signs of increased tightness in money markets, a key deliberation for the timing and path of QT, whilst reserves remain abundant within the economic system. He also said the choice shouldn’t impact the scale of the balance sheet over the medium term.
The central bank has been winding down its holdings since June 2022 — a process referred to as quantitative tightening, or QT — by step by step increasing the combined amount of Treasuries and mortgage bonds it allowed to run off without being reinvested. It last lowered its monthly cap in June 2024 to $25 billion from $60 billion.
The newest decision comes as lawmakers look to strike a deal on the debt ceiling, the statutory limit for outstanding Treasury debt. The US hit that limit in January. Fed Governor Christopher Waller was the lone dissenter amongst officials on the runoff, though he supported leaving rates of interest regular.
“Waller’s dissent on QT is notable and suggests some mixed opinions on balance sheet policy,” said Gennadiy Goldberg, head of US rate of interest strategy at TD Securities. “The explanation they moved the Treasury QT cap lower to only $5 billion is so they’re able to re-accelerate the pace of runoff after the debt ceiling is resolved. It’s easier to re-accelerate the pace when the cap is already non-zero.”
The longer it takes Congress to either suspend or lift the limit, the additional cash that can make its way back into the economic system. That has the potential to artificially boost reserves — currently $3.46 trillion — masking money-market signals that would indicate when is the fitting time to stop QT.
It’s those money-market signals that can dictate just how way more the Fed would give you the chance to shrink its $6.8 trillion portfolio of assets before worrisome cracks start to look, as they did in 2019 ahead of an acute funding squeeze.