VIEW: Goldman: An Earlier Start To QT Tapering

Goldman Sachs write “recent comments by Dallas Fed President Logan suggest that the FOMC will want to move more carefully as it approaches the stopping point for balance sheet runoff. As a result, we now expect the FOMC to begin tapering the pace of runoff in May.”

• “By slowing the pace of runoff, the FOMC can ensure that banks who need reserves are likely to get them in an orderly way, reducing the risk that market dysfunction forces the FOMC to stop runoff early, all else equal.”
• “We continue to expect the FOMC to end balance sheet runoff in Q125, and we expect the stopping point to be determined by the aggregate level of reserves rather than their distribution.”
• “We expect the FOMC to stop runoff when reserves go from “abundant” to “ample” in aggregate.”
• “Logan’s comments raise the risk that the FOMC will be more conservative and stop runoff while reserves are still clearly abundant.”
• “We continue to expect the Fed’s remaining balance sheet runoff to have modest effects on interest rates, broader financial conditions, growth, and inflation - much less than the impact of interest rate hikes this cycle. We likewise do not expect the earlier slowdown in the pace of runoff to have meaningful effects on the economy.”