As debate heats up on Wall Street over when the Federal Reserve will complete its current course of quantitative tightening, strategists are looking for more guidance on Wednesday when the US central bank releases the minutes of its latest policy meeting.
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Over the past week, the New York Fed posted a series of research notes on monetary policy implementation and reserve balances, themes that are key to the eventual end of QT. To Steven Zeng, a U.S. rates strategist at Deutsche Bank, this is the type of signaling policymakers could use as they move closer to winding down the program.
The central bank has been winding down its holdings since June 2022, during which time the balance sheet has shrunk by about US$1.7 trillion to $7.2 trillion. In June, policymakers lowered the cap for how much Treasuries it will allow to mature without being reinvested each month to $25 billion from $60 billion, a step meant in part to ease potential strain on money-market rates.
This time, market participants are attuned to any updates on bank reserve balances. Policymakers have said they still see abundant levels, though there’s concern over whether that will last if QT continues. Usage of the Fed’s RRP fell below $300 billion this month, while overnight repo rates have been elevated outside of typical mid-month and month-end periods, suggesting primary dealers are struggling to stomach so much Treasury supply.
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