If you’re looking for a wild card from this week’s Fed meeting, forget interest rates and focus on the balance sheet. The Fed’s $7.6 trillion holdings of Treasuries, mortgage-backed securities (MBS) and other assets may soon shrink and eventually cease. At Wednesday’s post-meeting press conference, Fed Chairman Jerome Powell is likely to give some hints on how the process will unfold. At the Fed’s last meeting in late January, Powell said the issue would be discussed at this meeting. With no surprises on the interest rate front, the central bank’s balance sheet approach may generate some interest. The focus will be on when to start tapering its bond purchases and how quickly the Fed will unwind its so-called “quantitative tightening” (QT). The Fed currently allows up to $60 billion in Treasuries to roll off the balance sheet each month without reinvestment, plus up to $35 billion in MBS, a level that almost never comes into play. Mark Zandi, chief economist at Moody’s Analytics, believes that “QT begins to wind down with the first rate cut in June, and they will gradually taper so that it ends in early 2025, and by then By then, they will have $7 trillion in assets.” Judging from the timetable, this is right in line with Wall Street’s unofficial consensus. Both Bank of America and Goldman Sachs expect the process to begin earlier in May and continue into the first quarter of 2025. The idea is that the monetary system will move from a surplus of bank reserves to a deficit. Both firms expect the rollover of U.S. Treasuries to be cut to $30 billion a month, ending when Goldman Sachs shrinks its balance sheet to $6.7 trillion. The move coincides with reduced demand for the Fed’s overnight reverse repurchase facility, an essential liquidity measure for banks in the coronavirus-era economy. Demand for so-called ON RRPs, which peaked at more than $2.5 trillion in late 2022, has fallen to $447 billion this week. “Risks to our base case favor a later slowdown in QT and an extension of QT duration,” Bank of America rates strategist Mark Wrote wrote. “We overestimate Dallas Fed President Logan’s guidance that when RRP balances reach ‘low levels’ “When the Fed will slow QT.” Hut. “If the Fed signals a slowdown in quantitative easing later than we expect, this will put modest upward pressure on money market rates and lead to a higher bill supply than our base case expectations.” Although there is no guarantee that the Fed will will reveal its balance sheet plans, but Powell will almost certainly face questions at a post-meeting press conference. Before the Fed begins QT in June 2022, Powell took the unusual step of advising the public and media to read the minutes of previous meetings for information on how the process will be conducted. Zandi said he expected Powell to do the same this time.
