According to a survey released on Thursday by the New York Fed, the largest banks on Wall Street changed their predictions before last month’s Federal Reserve meeting, indicating that the U.S. central bank will conclude its balance sheet reduction process later this year than previously believed.
Federal Current Balance Sheet
Primarily dealers, or banks, currently think that QT, or quantitative tightening, would conclude in the fourth quarter, according to a survey conducted in advance of the Federal Reserve’s policy meeting on December 12–13. According to the banks’ collective perception in the major dealer poll conducted prior to the policy meeting that concluded on November 1, the third quarter represents the end of QT.
The Federal Reserve’s current balance sheet, which stands at roughly $7.764 trillion, will shrink to $6.75 trillion if the dealers are correct. In addition, dealers forecast that the central bank’s reverse repo facility will hold $375 billion at the end of QT, less than the $625 billion that was anticipated in the October poll, in advance of the December meeting.
J.P. Morgan’s chief U.S. economist, Michael Feroli, stated in a note on Wednesday that additional information regarding the QT endgame will be released shortly. “We suspect this means that we could see a fuller discussion of potential balance sheet plans in the minutes” of the next Fed policy meeting, which is later this month, he said, given the emerging debate seen in the meeting minutes from December.
Money market rates, such as the federal funds rate and the secured overnight financing rate, are projected to have a significant role in the Fed’s decision-making, according to economists at Barclays.
They also wrote in a note that “we look for the Fed to err on the side of caution” and end QT in June or July before any signs of stress emerge, suggesting that they think the Fed may be more circumspect about testing how far it can go with running down the balance sheet in comparison to the view of primary dealers ahead of the December policy meeting.