Trump appointees appear to be pushing for lower short rates, but a couple of them are balancing this with very hawkish views on the balance sheet. With reserves dropping below $3t, the Fed is thinking about how its balance sheet will ultimately look as QT winds down. Waller and Bowman have kicked off the discussion by outlining their views on the size, composition and pace of transition. Their proposals suggest upward pressure on long rates …
Tag: quantitative tightening
Published on June 3, 2024 by Joseph Wang Premium
The Fed's most recent Senior Financial Officer Survey clarifies a couple of important signposts that will guide the Fed in managing the end of quantitative tightening. The SFOS is a periodic survey of bank executives on how they manage their reserve levels. The most recent survey revealed the spreads to interest on reserves required by banks to substitute reserves for comparable assets, an action commonly associated with reserve scarcity. The survey also shows which markets …
Published on April 1, 2024 by Joseph Wang Premium
The decline in RRP balances looks to slow in the coming months, which suggests the upward pressure in money market rates necessary to end QT will not appear until early 2025. Chair Powell strongly hinted at an imminent QT taper, but noted that QT would continue until signs of reserve scarcity emerge. Fed officials widely look to upward pressure in overnight rates as a key indicator for scarcity. The sequence from 2018 was first an …
Published on March 4, 2024 by Joseph Wang Premium
Governor Waller kicked off a post-QT discussion by proposing to increase the share of bills in the Fed's Treasury portfolio, a significant change that in effect extends QT beyond its official end date. Fed holdings of bills have varied significantly over the years, from a third of their Treasury portfolio pre-GFC to below 5% today. Waller suggests that the shift would reduce Fed operating losses and offer more flexibility in the event of future asset …
Published on January 29, 2024 by Joseph Wang Premium
The Treasury has an opportunity to lobby the Fed for an earlier QT taper by both rapidly draining the RRP and pushing up repo rates through further increases in net bill issuance. While Congress determines the size of the fiscal deficit, the Treasury and Fed together determine the supply of duration to private investors. The Fed has increased the overall level of issuance to private investors through quantitative tightening, but Treasury has cushioned the market …
Published on January 16, 2024 by Joseph Wang Premium
Fed officials are planning to taper QT, but have expressed a range of views that place a taper anywhere from this quarter to much later. In the absence of a rise unemployment, the path of QT will be guided by the amount of liquidity in the financial system. However, Fed officials have expressed disagreement on which components of liquidity to emphasize. They have focused on RRP levels, reserve levels, or the consolidated level of the …
Published on October 30, 2023 by Joseph Wang Premium
The rapid decline in the Fed's RRP facility has not impacted financial conditions, but will eventually provide a modest degree of easing in the coming months. RRP balances have declined by almost $1.1t since June largely due to significant bill issuance, which financed a $800b increase in the Treasury General Account. The balance of the decline went into commercial banks and vanished through QT. With net bill issuance set to increase, the RRP may approach …
Published on February 13, 2023 by Joseph Wang Free
QT is incrementally improving the transmission of monetary policy by increasing the share of financial assets sensitive to the Fed’s policy rate. Although the policy rate is approaching 5%, trillions of bank deposits continue to offer around 0%. QT strengthens the transmission of policy by mechanically replacing bank deposits with policy rate sensitive Treasuries, and by forcing banks to compete more aggressively for deposit funding. Both outcomes raise the interest rate on assets held by …
Published on January 23, 2023 by Joseph Wang Free
Governor Waller suggests two significant changes to the Fed’s QT framework that effectively removes all obstacles to an extended QT. First, Waller suggests that the $2t in RRP balances should be consolidated with bank reserves when thinking of bank liquidity levels. This indicates that the Fed would be comfortable with bank reserve levels dropping below the roughly estimated $2.5t minimum level. Second, Waller appears to be open to maintaining QT even if policy rates are …
Published on December 19, 2022 by Joseph Wang Free
A change in the underlying plumbing of the financial system is making it unlikely that QT can run its expected 2+ year course. An ideal QT would drain liquidity in the overall financial system while keeping liquidity in the banking sector above a minimum threshold. That is only possible if the bulk of the liquidity drained is sourced from the $2t RRP, which holds funds owned by money market funds. MMFs could facilitate QT by …