The Fed began shrinking its balance sheet in June (at a pace which for various reasons many have found to be too slow but in reality is just as fast as had been expected, as we will explain tomorrow) and plans to double the pace at which it reduces its securities portfolio in September. And while there are ample reserves and liquidity for now, many prominent Wall Street strategists have warned that the Fed will have no choice but to end its QT much earlier than expected.
Some more details on the recent trajectory of QT, courtesy of SocGen's Stephen Gallagher:
Fed to roll off as much as $95bn per month from September. The Fed allowed $30bn of Treasury and $17.5bn of mortgage-backed holdings to mature in June. In September, the Fed will double that amount, increasing the caps or run-off amounts to $60bn per month for Treasuries and $35bn per month for mortgage-backed securities. The impact on yields, if any, has been overshadowed by macroeconomic concerns and volatile rate-strategy expectations. For now, the primary channel for monetary policy remains the fed funds rate.
2019 taught us that the Fed needs to maintain a flexible approach to its balance sheet policy. The size and pace of shrinkage should be tied to both economic performance and to controlling short-term rates that are intricately tied to its fed funds rate policy, such as repo rates for secured overnight lending.
Fed balance sheet liquidity for financial institutions at $5.5tn. In 2017-2019, the Fed’s balance sheet run-off shrank bank reserves held at the Fed from a peak of $2.36tn to $1.39tn in September 2019 when repo markets turned...