Fed’s Powell is looking at ways to reduce Fed holdings
Michael S. Derby
NEW YORK (Reuters) – Beyond testimony in the last two days before Congress, Federal Reserve Chairman Jerome Powell said the central bank’s balance sheet was on the move as some banks moved back to push back their closing dates. It showed that it had burned up. A process commonly referred to as quantitative tightening.
I think there’s a “way to” reducing the size of central bank bond holdings, but indications that market liquidity has been shrinking to the point that it affects the Treasury and the decline in mortgage bond holdings. There is none yet. .
Powell’s observation (or QT) on quantitative tightening comes as the Fed has only exceeded $2 trillion from its holdings. The Fed has stabilised the liquidity added to the market during the Covid-19 pandemic when it bought trillions of bonds to stabilize the market by lowering long-term borrowing costs and stabilize the economic growth of geese. I’m trying to destroy it.
Since the Fed launched QT, the market-wide liquidity has been reduced to the level of the bank reserves, which has been the most clearly measured at the level of bank reserves, to the level that allows for normal levels of market interest rate volatility. I’m trying to make it. , the main tool that influences the momentum of the economy.
The Fed is also trying to avoid replaying the September 2019 event in the final chapter of QT, where too much liquidity has been removed from the system and demand that the Fed begin to actively add it.
The Fed has taken many steps to avoid happening again, such as slowing the pace of drawdowns and providing more guidance on factors that are watching while setting up new liquidity facilities. . However, we are struggling to provide a lot of guidance on when QT can be stopped, except that the day does not seem to be imminent.
In recent days, some banks have pushed back QT Endgame estimates compared to the latest consensus that looked at the June suspension day.
“Recent communications suggest that the Fed is happy to continue to carry out QT despite the potential for less visibility into reserve demand over the coming months due to debt limit dynamics. “We’re doing that,” the Goldman Sachs economist said in a report Friday.
Bank forecasters had hoped the Fed would finish the drawdown at the end of the second quarter, but it turns out that it was happening at the end of the third quarter. The mortgage ended by the third quarter.
Morgan Stanley’s economist was kicked by QT in the future.