Source: Bloomberg

The Fed will start to discuss in -depth asset liabilities this week, including when and how to slow down the speed of recovering excess flow of flow from the financial system.

The core of

Discussion is before the emergence of rare cracks, what kind of rhythm should be reduced for 7.5 trillion US dollars (about S $ 10 trillion) asset liabilities.

Since 2022, the Fed has allowed US $ 60 billion in US Treasury bonds and US $ 35 billion in US mortgage loan support securities (MBS) to leave the balance sheet. This process is called quantitative tightening (QT).But the Fed cannot maintain this pace forever.

More and more people are thinking about what factors can promote the Fed to slow down the shrinkage. When will this type of announcement be issued?

Why is the Fed's discussion now slowing down?

Because the decision maker does not want to see the market chaos caused by the last shrinkage.

In 2018, the Fed allows the US $ 30 billion in U.S. Treasury bonds and $ 20 billion in the balance sheet to support MBS naturally expires (about half of the current monthly reduction).Speed.

When the Fed is operated, market pressure is already obvious.

The increase in government debt bonding and the tax payment of the enterprise caused a shortage of reserve in September 2019. A benchmark loan interest rate soared four times, and the interest rate of federal funds soared to the target range.The Fed was forced to intervene in stabilizing the market.

Although the market indicators show that the bank's reserve is still abundant, some signs show that the Fed may start to consider slowing down the pace.

What are officials looking at?

Dallas Federal Reserve Governor Lorie Logan has said that it has now reached the time when the plan is finally slowed down.

She also emphasized several key reference indicators, including overnight reverse repurchase tools (RRP) usage.It is currently hovering around about 440 billion US dollars.

Officials are still paying attention to signs of market pressure.So far, this signal is not many, but the fluctuations at the end of November last year and December have indeed promoted a guaranteed overnight financing interest rate (SOFR) to a historical high.

When will the code be reduced?

This is one of the biggest issues currently facing the Federal Reserve.

LOGAN said earlier this month that the Fed needs to touch the river by touching the river. When the RRP uses the amount to the low position, it will be the right time to slow down the shrinkage.But it is unclear when this situation will happen, and I do n’t know if other members of the Federal Open Marketing Committee deny the same Logan.

This makes it difficult for Wall Street strategists to determine the specific moment when the code reduction table is reduced. Most economists' predictions ranged from May to September.This question is completely different from when the Fed cuts interest rates.

Among the many factors that may be delayed, the most obvious is the tax reporting season and the cash balance of the Ministry of Finance, which is one of the largest liabilities on the Fed's balance sheet.Increase in tax revenue may lead to a reduction in short -term bonds issuing or helping to promote more cash back to RRP.

Logan emphasized that slowing down the footsteps does not mean to stop completely.

How long can the Federal Reserve shrinkage last?

Once the Fed began to slow down the shrinkage, some people think that they will continue until later 2025.However, this also depends on the best level of reserve. At this level, the financial system has enough liquidity and maintains stable market interest rates overnight.

Fed Chairman Powell previously said that the central bank hopes that the level of reserve is higher than the minimum appropriate value in the system, but he does not provide specific figures.A Survey of the Fed in September showed that the degree of supply may be significantly higher than the level of policy makers believe.

Part of the reason is that many banks are more willing to increase the reserve holding to ensure sufficient liquidity.

Bank of America and Morgan Stanley believe that once the reverse repurchase tools are used in full, various short -term interest rates, including SOFR, the federal fund interest rate will begin to rise within the target range of the central bank. This is becauseThe banking industry may continue to do their best to hold reserve.