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Investing.com - An ongoing slowdown in a runoff in the Federal Reserve’s balance sheet is seen easing further at its latest policy meeting this week, according to analysts at UBS.
In minutes from the central bank’s January meeting, an unknown number of policymakers flagged that they were considering either tapering or pausing this process, dubbed quantitative tightening, or QT.
Officials noted at the time that the shift into slowing QT was perhaps prudent because of murkiness around the outlook for market liquidity and broader government finances. Worries surrounded whether withdrawing too much liquidity could dent money markets and threaten the Fed’s control over the federal funds rate, a major tool that can help sway the direction of the economy, the minutes showed.
The Fed has not been replacing some of its expired Treasury and mortgage bonds since 2022, a move that has seen its portfolio of holdings fall to $6.8 billion in late February from a peak of $9 trillion. However, it is still unclear how far the Fed will go in its liquidity withdrawals before halting QT.
Speaking with Reuters last month, Cleveland Fed President Beth Hammack said her "baseline preference" is for the Fed to keep going with the drawdown as Washington negotiates its spending plans and adjusts the debt ceiling to account for its borrowing needs.
Hammack added that, once these issues are resolved, the Fed could employ temporary bond repurchases, also known as repos, to place more liquidity back into the system. Should such a tactic be employed, the UBS analysts predicted that the Fed’s decision to taper its balance sheet drawdown may be "push[ed] off" until May or June.
The brokerage added that Fed members have not "reached the level of market readiness" needed to fully halt QT in March.
"[A] full stop to QT may need to wait until the May meeting to minimize any market confusion at the time of announcement. Stopping QT altogether would likely be seen as a significant shift, so we think the Fed would look to prepare the market for this at later meetings," the analysts wrote.