QT + Cuts "Could Happen", But No FOMC Consensus Yet (1/2)

As we noted in our previous Fed Balance Sheet Tracker on Aug 4, Chair Powell replied to an MNI question at the July FOMC press conference about whether QT would continue if the Fed started cutting rates in 2024 with: “So that could happen.”

• The JulyFOMC meeting minutes echoed this, including: “a number of participants noted that balance sheet runoff need not end when the Committee eventually begins to reduce the target range for the federal funds rate.”
• On the margins, the prospect of QT continuing while short-term rates are falling has probably helped underpin longer-term rates and curve steepening overall since the July meeting.
• There doesn’t appear to be consensus on the FOMC about this approach though. Philadelphia Fed Pres Harker told MNI on the sidelines of the Jackson Hole symposium this week that “I haven’t come to any definitive conclusion on that. My preference right now would be to not cut rates as we are continuing the quantitative tightening. I think it is a bit confusing, but there may be circumstances where that is appropriate to do, we’ll just have to see.”
• It is quite early for to be making definitive pronouncements about such a shift in policy, to be fair, and the FOMC will probably only start looking into the pros and cons after the hiking cycle has come to an end. But the recent communications suggest that it’s at least on the Fed’s mind as they seek to bring the balance sheet back to resemble something closer to “normal”.
• The baseline market/analyst view at this point seems to be that QT would continue if rate cuts were seen as “passive”, to keep real rates constant as inflation subsided, but the Fed would stop shedding assets if the cuts were made amid a recession.