Federal Reserve Slows Quantitative Tightening to Address Liquidity Concerns

The Fed will reduce its Treasury runoff cap to $5 billion starting April 1, citing challenges tied to the debt ceiling and reserve management.

The Federal Reserve announced it will slow the pace of balance sheet reduction, lowering the monthly Treasury runoff cap from $25 billion to $5 billion while keeping the mortgage-backed securities cap at $35 billion.
This adjustment, effective April 1, is aimed at managing liquidity challenges linked to the ongoing debt ceiling standoff and ensuring financial stability.
Fed Chair Jerome Powell emphasized that the slowdown will not affect the ultimate size of the balance sheet or signal changes in monetary policy.
Fed Governor Christopher Waller dissented, advocating for maintaining the previous pace of quantitative tightening.
The decision reflects lessons from past QT efforts, such as the 2019 funding squeeze, and seeks to avoid reserve scarcity while extending the QT process smoothly.