Fed’s Powell says end of balance sheet drawdown may be nearing
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by Michael S. Derby
(Reuters) -Federal Reserve Chairman Jerome Powell said on Tuesday that the end of the central bank’s long-running effort to shrink the size of its holdings, commonly known as quantitative tightening, or QT, could be in sight.
Given the central bank’s long-term goal of leaving enough liquidity in the financial system to allow for tight control of short-term interest rates and normal money market volatility, Powell said “we may be approaching that point in the coming months, and we’re watching a wide range of indicators closely to know whether that’s happening.”
His comments came from a speech prepared for a meeting of the National Association for Business Economics in Philadelphia.
“Some signs of gradual tightening of liquidity conditions are beginning to emerge, including a general tightening of repo rates as well as more pronounced but temporary pressures on selected dates,” Powell said.
The QT process, which has been in place since 2022, is designed to eliminate the excessive amounts of liquidity the Fed has added to financial markets during the COVID-19 pandemic. Large-scale purchases of Treasury and mortgage bonds were aimed at stabilizing markets and providing stimulus at a time when the Fed’s short-term interest rate target was near zero.
The asset purchases helped the Fed’s assets more than double to $9 trillion. Since 2022, allowing a certain amount of bonds to mature and remain unchanged has helped shrink the Fed’s balance sheet to $6.6 trillion.
It’s unclear how far the Fed can go with QT, but some officials have suggested they could move forward with QT without shaking up money markets, saying there’s plenty of liquidity left in the financial system.
Powell did not say how much the Fed might shrink its holdings. But so far he said: “As a result, our large reserve regime has proven highly effective in implementing monetary policy and promoting economic and financial stability.”
Powell also warned against removing the interest-paying powers that enable the Fed’s rate control toolkit to operate effectively, stating that losing that power would lead to serious stress in financial markets.
Powell also said, “Our experience since 2020 shows that we can be more agile in our use of the balance sheet in the future.”
(Reporting by Michael S. Derby; Editing by Andrea Ricci)
