The Lombard Review
Economy

The Fed slows its balance-sheet shrinking

Slower runoff delays reserve scarcity

The Federal Reserve Board's Eccles Building on Constitution Avenue
The Federal Reserve Board's Eccles Building on Constitution AvenuePhoto: AgnosticPreachersKid / Wikimedia Commons, CC BY-SA 3.0
1 min read Data: Treasury cap $25bn from June

At its May policy meeting, the Federal Reserve delivered an important structural adjustment to its monetary plumbing by announcing a substantial taper of its quantitative tightening (QT) programme. Starting in June, the monthly cap on maturing US Treasuries allowed to run off without reinvestment will be slashed from $60 billion to $25 billion.

The Bureau of Engraving and Printing, which prints U.S. currency
The Bureau of Engraving and Printing, which prints U.S. currencyPhoto: Harrison Keely / Wikimedia Commons, CC BY 4.0

Preserving the Reserve Buffer

By slowing the pace of balance-sheet runoff, Jerome Powell is attempting to avoid a repeat of the September 2019 repo market seizure. With the Overnight Reverse Repo facility rapidly depleting, continuing QT at full throttle would soon drain cash directly from bank reserves. Tapering runoff extends the runway of balance-sheet reduction while minimizing the risk of a catastrophic wholesale funding crunch.

The Lower Manhattan skyline from Liberty Island
The Lower Manhattan skyline from Liberty IslandPhoto: Percival Kestreltail / Wikimedia Commons, CC BY-SA 3.0

Tapering quantitative tightening is an essential precautionary move by the Fed, designed to forestall money market volatility before balance-sheet runoff starts cannibalizing critical bank reserves.