MNI INTERVIEW: Fed QT Has Room To Run Well Into 2026-Crandall
MNI (LONDON) - Further reductions in the Federal Reserve's balance sheet through quantitative tightening are likely to continue until well into next year, or even longer given that the Treasury Department is likely to adjust its policy of how much it holds in its cash pile, Wrightson ICAP Chief Economist Lou Crandall told MNI.
There is "no indication whatsoever" that reserve balances are approaching a point where the Fed's QT program needs to stop, he said. The Fed's "long-run strategy has not changed" and the QT program will continue "potentially well into 2026."
"We're in a situation where we don't know if a normalized post-debt ceiling balance sheet would create some liquidity strains," Crandall said. "The odds of that are essentially nil, but we don't know. The strategy to potentially slow the pace of runoff is consistent with the original gradual approach to the new equilibrium. But the idea always was that the long run objective hadn't changed."
SLOWDOWN
Various FOMC officials in January said the Fed should consider pausing or slowing balance sheet runoff to avoid the risk of over-draining reserves, according to minutes of the meeting. Many in markets expect an end to QT this year, but Crandall sees it lasting longer. (See: MNI POLICY: Fed Seeks Market Signals To End QT, Pause Possible)
"The debt ceiling could mean that you hit that boundary between ample and less than ample more abruptly than you've been anticipating, and so you might want to tread carefully around that," Crandall said. If Fed officials "slow the pace of runoff in the next few months, I'm not sure that they will, but if they do that it just pushes back the timeline on traditional QT farther because they're accomplishing less normalization in the short run and that means they've got to keep on doing it longer."
Crandall will be watching budget negotiations on Capitol Hill over the next few weeks. The Fed could put out a "marker" on QT plans at the March meeting if debt ceiling talks stretch out further and signal a "slow down at the next meeting," he said.
The Fed is currently running off roughly USD40 billion a month in assets, USD25 billion of Treasury securities and roughly USD15 billion in MBS holdings.
"If they are going to slow the pace, it would be to reduce overall runoffs in half temporarily," Crandall said. "If you cut from USD40 to USD20 per month, you would continue to do a minimal USD5 billion a month in Treasury runoffs as a marker showing continuing to allow the portfolio to run off," while leaving the MBS pace unaltered.
TGA UNCERTAINTY
The Treasury Department has been targeting a USD850 billion cash pile and Crandall, who began his career at the New York Fed, is watching whether officials change that in the months ahead.
"I'm uncertain whether the end of QT comes in 2026 or 2027 and the reason is something that's surprisingly absent from much of discussion right now and that's that we may see a significant change in the Treasury's cash management policy,” he said.
"That could come down at least to USD500 billion in the coming quarters and it is not inconceivable that it could come down more than that," Crandall said. "A USD500 billion target is perfectly reasonable. As you go below that, I get a little bit concerned, because I sympathize with all the potential reasons why the Treasury wanted to have a substantial cash reserve in the event of unforeseen circumstances, whether it be cyber attacks or something else. I don't think the world is becoming more predictable place."
If the Treasury lowers its quarterly target cash pile by USD350, then that leaves even more space for the Fed to roll off its balance sheet, he said. "At the end of all of this, and if you're running off USD40 billion a month after the debt ceiling episode, that's a long time."