(Bloomberg) — The Federal Reserve said it will start shrinking its balance sheet at a slower pace starting next month, reducing the amount of bond holdings it lets roll off every month.
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Officials, who left interest rates unchanged on Wednesday, said they’ll lower the cap starting April 1 on the amount 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, even as reserves remain abundant in the financial system. He also said the decision shouldn’t impact the size of the balance sheet over the medium term.
The central bank has been winding down its holdings since June 2022 — a process known as quantitative tightening, or QT — by gradually 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 latest 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 among officials on the runoff, though he supported leaving interest rates steady.
“Waller’s dissent on QT is notable and suggests some mixed opinions on balance sheet policy,” said Gennadiy Goldberg, head of US interest rate strategy at TD Securities. “The reason they moved the Treasury QT cap lower to just $5 billion is so they are 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 more cash that will make its way back into the financial system. That has the potential to artificially boost reserves — currently $3.46 trillion — masking money-market signals that could indicate when is the right time to stop QT.
It’s those money-market signals that will dictate just how much more the Fed would be able to shrink its $6.8 trillion portfolio of assets before worrisome cracks start to appear, as they did in 2019 ahead of an acute funding squeeze.
