By Michael S. Derby
(Reuters) – Wall Street’s ever-shifting outlook on the reduction of the Federal Reserve’s balance sheet is once again in flux, with a number of banks and researchers now seeing a good chance the central bank may slow further or pause the effort at this week’s policy meeting.
The Fed’s two-day interest-rate-setting meeting concludes on Wednesday, with little expectation for a change in rate policy but some indications that Fed officials are growing concerned that the reduction of bond holdings under quantitative tightening, or QT, may cause issues in money markets while the Treasury Department faces constraints managing government finances under the federal debt limit.
“We think the Fed will opt for a slowdown” in the pace of Treasury bond run-off, said Evercore ISI analysts. “The Fed could announce this change at the March meeting to get ahead of potentially complicated meetings on the rates side in May and June.
Bank of America said that at a meeting defined by heightened uncertainty, largely arising from the wave of tariff announcements by the Trump administration, “QT will likely be paused.”
Goldman Sachs forecasters, meanwhile, said the Federal Open Market Committee statement “is likely to announce a pause in QT beginning in April, and we expect forward guidance indicating that QT is expected to resume once the debt ceiling is resolved and the liability composition of the balance sheet normalizes.”
The expectation for a pause is not universal, however.
“We also do not anticipate significant changes” to the QT effort right now, TD Securities said.
The uncertainty around QT – underway for more than two years now – follows meeting minutes from the Fed’s January meeting, which noted Treasury’s efforts to manage cash during an impasse over raising the federal borrowing limit would likely cause big swings in money market liquidity. That is likely to make it hard to measure the impact QT may have on the situation.
To pay the bills while borrowing is currently capped the Treasury is drawing down its account at the Fed, adding liquidity to the financial system. When the cap is eventually lifted, it will rebuild this account, sucking that liquidity back out. That dynamic makes it difficult to get a clear handle on how much liquidity is in the system.
The minutes suggested pausing or stopping the drawdown temporarily would give the Fed space to take stock of the situation and resume QT once the clouds lift.
SCANT GUIDANCE
Outside of the minutes, which said “various” policymakers were open to a QT slowdown or pause, Fed officials haven’t offered much guidance.
