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QT To Continue Alongside Rate Cuts? (3/3)

FED

QT looks set to continue running in the background indefinitely, with the runoff caps set at $60B Tsy/$35B MBS.

  • MNI asked Chair Powell at the July FOMC press conference whether QT would continue if the Fed started cutting rates in 2024, and he replied:
    • “So that could happen. The question is… if you think about both of them as normalization, imagine it's a world where things are okay and it's time to bring rates down from what are restrictive levels to more normal levels. Normalization in the case of the balance sheet would be to reduce QT so, or to continue it depending on where you are in the cycle. So they are two independent things and you know, really the active tool of monetary policy is rates. But you can imagine circumstances in which it would be appropriate to have them working in what might be seen to be different ways. But that wouldn't be the case.”
  • Prevailing analyst opinion is that all else being equal, QT would continue if rate cuts were seen as “passive”, to keep real rates constant as inflation subsided, but would be stopped if the Fed was cutting amid a recession.
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