January Minutes: QT Taper Set To Start Later...With Longer Runoff? (2/2)

For balance sheet policy, the "eventual decision" implies that the quickest possible timeline to slow runoff is likely the March press conference/meeting minutes set up a May decision and a mid-year start to tapering QT.

• But the risks seem very much tilted to an even later move: we haven't heard any urgency from participants on taking action on this issue, and there isn't anything concrete tying a decision to the ON RRP facility running down. The staff description of the unworrying state of reserves and the pace of decline likely to mirror QT runoff suggests the decision will be based on how the FOMC sees liquidity issues manifesting themselves in money markets, and nothing mechanical to do with ON RRP running out (contrary to some analyst expectations).
• The Treasury taper could also turn out to be more gradual than the consensus envisaging a halving to $30B/month from $60B/month from midyear: some participants noted "given the uncertainty surrounding estimates of the ample level of reserves, slowing the pace of runoff could help smooth the transition to that level of reserves or could allow the Committee to continue balance sheet runoff for longer".

Taken together, the communications from the minutes mean the best guess is that the FOMC is very tentatively envisaging a first cut in June and quarterly cuts thereafter coinciding with new economic projections - consistent with the December SEP for 3x cuts in 2024. The QT taper could be finalized and announced in May (to avoid complicated communications alongside a June cut) for a June start, potentially with a less drastic cut in runoff pace to begin with (ie to $45B from $60B), but risks are firmly that a decision could wait until June or July.

• We've already seen some sell-side analysts change their views on QT tapering post-Minutes: JPMorgan ("Given this leisurely-sounding schedule, we are now pushing back the announcement of a reduction in the monthly caps from the March meeting to the June meeting."), while some of the later-taper analysts saw their views reaffirmed, including Wrightson ICAP ("We have not yet adjusted our original guess that the Fed would start to scale back its monthly runoffs starting with the Treasury’s July auction cycle, but the risks in that forecast continue to be skewed toward a later start date for the QT tapering announcement.")