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FED: Dec Minutes Preview: Eye On QT (3/3)

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  • Balance Of Risks: The diffusion indices of participants' uncertainty assessments released with the projections showed that FOMC officials were much more concerned about inflation risks than they were in September. Even if the Statement didn’t change its assessment of the balance of risks (“roughly in balance”), we will be watching to what degree the following sentence changes from the November meeting minutes: "Almost all members agreed that the risks to achieving the Committee's employment and inflation goals were roughly in balance."
  • Eye On QT: As largely expected at the meeting, the Fed adjusted the offer rate on the overnight reverse repo facility down 5bp vs other administered rates, explaining "setting this rate at the bottom of the target range for the federal funds rate is intended to support effective monetary policy implementation and the smooth functioning of short‑term funding markets.” While the minutes are likely to still show that the FOMC considers reserves to be “abundant”, we wonder whether there was a broader discussion about balance sheet policy going into the New Year as QT continues to run in the background.
  • There is widespread expectation that QT will end by mid-2025: for example the NY Fed’s November survey of Primary Dealers had a median expectation of runoff ending at May, with the central range being between March and July; the Market Participants survey saw it ending in March, with the central expectation being between January and June. As such, the FOMC may have to start laying the groundwork for a smooth end to QT.
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  • Balance Of Risks: The diffusion indices of participants' uncertainty assessments released with the projections showed that FOMC officials were much more concerned about inflation risks than they were in September. Even if the Statement didn’t change its assessment of the balance of risks (“roughly in balance”), we will be watching to what degree the following sentence changes from the November meeting minutes: "Almost all members agreed that the risks to achieving the Committee's employment and inflation goals were roughly in balance."
  • Eye On QT: As largely expected at the meeting, the Fed adjusted the offer rate on the overnight reverse repo facility down 5bp vs other administered rates, explaining "setting this rate at the bottom of the target range for the federal funds rate is intended to support effective monetary policy implementation and the smooth functioning of short‑term funding markets.” While the minutes are likely to still show that the FOMC considers reserves to be “abundant”, we wonder whether there was a broader discussion about balance sheet policy going into the New Year as QT continues to run in the background.
  • There is widespread expectation that QT will end by mid-2025: for example the NY Fed’s November survey of Primary Dealers had a median expectation of runoff ending at May, with the central range being between March and July; the Market Participants survey saw it ending in March, with the central expectation being between January and June. As such, the FOMC may have to start laying the groundwork for a smooth end to QT.