Wall Street pushes out end of Fed balance sheet wind-down, minutes show
The drawdown of the Fed's stock of bonds is now expected to stop in February when the balance sheet stands at $6.2 trillion, big banks and money funds told the U.S. central bank ahead of last month's policy meeting, the minutes noted. That represents a small shift from what survey respondents said ahead of the Fed's policy meeting in early May, when they eyed a January end date, and $6.125 trillion in total holdings.
The Fed has been shrinking the size of its balance sheet since the summer of 2022 in an effort referred to as quantitative tightening, or QT. The central bank has allowed set amounts of bonds it bought during the COVID-19 pandemic to mature and not be replaced, in an effort that so far has taken the overall stock of cash and bonds it holds from a record $9 trillion to the current level of $6.7 trillion.
The Fed more than doubled its bond holdings to stabilize markets and then provide stimulus to the economy beyond what could be delivered by near-zero short-term rates. The QT program has been aimed at removing excess levels of liquidity from the market as part of a broader monetary policy normalization, but there's been ongoing uncertainty when that process could end, and at what level of holdings the Fed would be able to rest at.
For some time, market participants have expected the Fed to stop QT this year. But earlier in 2025 the Fed slowed QT in order to reduce the risk of market disruptions while the Treasury Department took action to deal with government financing needs during wrangling over the government's official borrowing limit and its broader budget needs.
Much of that uncertainty was resolved last week with the passage of a Trump administration budget bill that lifted the borrowing cap, which will allow the Treasury to sell more debt. Increased debt sales will cut into the reserve levels the Fed has been trying to shrink with QT.
The reserves now stand at around $3.3 trillion, a level that's been steady for some time. The minutes released on Wednesday said market participants told the Fed they see reserves dipping to $2.9 trillion due to QT. Respondents also said the Fed's reverse repo facility, which held $227 billion on Wednesday, should move to a "low" level.
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The Independent
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