SoFi shares rise as record revenue, member growth drive strong Q3 results
Investing.com - The Federal Reserve could opt to bring an end to a longstanding balance sheet reduction at its policy meeting this week, according to analysts at Barclays.
Some Wall Street analysts have been predicting that the Fed could finally push stop on an effort to shrink the size of its roughly $6.6 trillion balance sheet by reducing its holdings of Treasuries and mortgage-backed securities -- a process known as quantitative tightening, or QT -- this month or at its final gathering of 2025 in December, flagging indications of rising frictions in money markets.
The central bank previously purchased much of these holdings during past periods of financial stress to help moderate interest rates, bolster markets and support the wider economy.
But, following a multi-year reduction in its balance sheet after a glut of buying during the pandemic pushed the figure up to a peak of almost $9 trillion in 2022, the liquidity needed to keep the gears of the market churning has shown indications of drying up.
The impact of this dynamic became clear in short-term money markets this month, when banks and others were on the hunt for more cash than there was available to lend. Overnight interest rates rose as a result, at one point surpassing the Fed’s target range.
Against this backdrop, Fed Chair Jerome Powell has recently hinted that the end of QT was approaching, fueling predictions that the Fed may choose to announce its conclusion or lay out a roadmap for winding it down. The Fed has previously noted that it will completely halt balance sheet reductions when officials gauged that there were "ample" reserves in the banking system.
Powell did not specifically use this language in a speech earlier this month, but said reserves "appear to remain abundant," albeit declining.
In a note to clients, the Barclays analysts said pressure has ratcheted up on short-term funding markets in recent weeks, with the Fed’s backstop facility meant to tamp down funding rates seeing "regular usage."
"This has investors wondering if the Fed will halt balance sheet run-off this week. While we think the Fed will wait until the December meeting to announce the end of QT, we think it will be a close call," the analysts including Lefteris Farmakis and Samuel Earl wrote. "There are also good reasons for them to stop sooner rather than waiting, which largely boils down to risk management considerations."
They added that there are "scars" from the Fed’s experience in 2019, when deep balance sheet shrinking caused a temporary cash crunch that sent short-term borrowing costs soaring.