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FED: FOMC May Not Be Pointing To Big QT Shift But Maturities Worth Eyeing (2/2)

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  • Wrightson ICAP writes that "Less QT now would mean more QT later." Slowing the pace of its balance sheet contraction temporarily during the debt ceiling endgame might be a valuable insurance policy. It is important to note, however, that the minutes suggested that this might only be a temporary adjustment...If market conditions are showing no indication of reserve stringency when we get to the far side of this debt ceiling episode, the Fed presumably would not only resume its portfolio runoffs but would extend them farther into the future to make up for the lost time this spring or summer."
  • Citi is skeptical that the discussion of QT policy is indicative of a major shift, and while they acknowledge risks of a pause/slowdown in QT in March/May, they remain "comfortable" with their base case for the end of QT: "Chair Powell did not mention any of these discussions when he was asked about the balance sheet during the January press conference so it could be that “various” participants is not a large group and does not represent the consensus in the Committee. This language is also less strong than in the minutes last year when “the vast majority of participants” wanted to slow down the pace of runoff which subsequently started in June...In our view, the Fed is aiming to guide expectations towards the possibility of a sooner end to the balance sheet runoff in case bank reserves have the potential to drop meaningfully within a short period of time during the Treasury cash account rebuild."
  • Deutsche pays special attention to the FOMC's discussion of the future maturity profile: "On the SOMA portfolio, the Committee appears to indicate a preference for future secondary-market Treasury purchases to mirror the maturity composition of the outstanding market. This 'market-proportional portfolio' approach contrasts with the alternative of a 'short-maturity portfolio', which would focus future purchases primarily in T-bills. This revelation is notable as it differs from the consensus view of primary dealers that the Fed will focus future purchases at the short-end of the curve.' This "would lower the weighted
    average maturity of SOMA, but at a much more gradual pace compared to the 'short-maturity portfolio' alternative."
  • Barclays notes (as reported by Bloomberg) that a temporary pause in runoff would not make a great deal of difference in terms of the level of reserves versus stopping altogether shortly thereafter. They therefore maintain their view that the Fed won't make a decision on QT until the May or June meetings, though there are risks that runoff could be halted in March/May/June.
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  • Wrightson ICAP writes that "Less QT now would mean more QT later." Slowing the pace of its balance sheet contraction temporarily during the debt ceiling endgame might be a valuable insurance policy. It is important to note, however, that the minutes suggested that this might only be a temporary adjustment...If market conditions are showing no indication of reserve stringency when we get to the far side of this debt ceiling episode, the Fed presumably would not only resume its portfolio runoffs but would extend them farther into the future to make up for the lost time this spring or summer."
  • Citi is skeptical that the discussion of QT policy is indicative of a major shift, and while they acknowledge risks of a pause/slowdown in QT in March/May, they remain "comfortable" with their base case for the end of QT: "Chair Powell did not mention any of these discussions when he was asked about the balance sheet during the January press conference so it could be that “various” participants is not a large group and does not represent the consensus in the Committee. This language is also less strong than in the minutes last year when “the vast majority of participants” wanted to slow down the pace of runoff which subsequently started in June...In our view, the Fed is aiming to guide expectations towards the possibility of a sooner end to the balance sheet runoff in case bank reserves have the potential to drop meaningfully within a short period of time during the Treasury cash account rebuild."
  • Deutsche pays special attention to the FOMC's discussion of the future maturity profile: "On the SOMA portfolio, the Committee appears to indicate a preference for future secondary-market Treasury purchases to mirror the maturity composition of the outstanding market. This 'market-proportional portfolio' approach contrasts with the alternative of a 'short-maturity portfolio', which would focus future purchases primarily in T-bills. This revelation is notable as it differs from the consensus view of primary dealers that the Fed will focus future purchases at the short-end of the curve.' This "would lower the weighted
    average maturity of SOMA, but at a much more gradual pace compared to the 'short-maturity portfolio' alternative."
  • Barclays notes (as reported by Bloomberg) that a temporary pause in runoff would not make a great deal of difference in terms of the level of reserves versus stopping altogether shortly thereafter. They therefore maintain their view that the Fed won't make a decision on QT until the May or June meetings, though there are risks that runoff could be halted in March/May/June.