By Michael S. Derby
New York (Reuters) – Over two days of evidence this week before Congress, Federal Fund Chairman Jerome Powell noted that there is no end to the end of the central bank balance sheet, as some banks have moved to push their own finish date for ay the process commonly referred to as quantitative tightening.
“I think we have ways to go” on reducing the size of central bank bond holdings and there are no signs yet that market liquidity has shrunk enough to affect the Fed reduction in Treasury and Mortgage Bonds, Powell told a house panel on Wednesday.
Powell's observations come on quantitative tightening, or QT, as the Fed throws just over $ 2 trillion of his holdings. The Fed tries to extinguish liquidity that added to markets during the Covid-19 pandemic, when bought drillions in bonds to stabilize markets and economic growth goose by reducing longer-term borrowing costs.
Since the Fed started QT it has been trying to reduce the overall market liquidity, most noticeably measured in the bank's level of reserves, to levels that allow for normal levels of volatility of money market interest rate, when Allow the management of the company fed over the federal fund rate, its main instrument to influence the economy's momentum.
The Fed is also trying to avoid replaying September 2019 events when excess fluidity, during its last episode of QT, was pulled out of the system, requiring the Fed to start adding it back in aggression.
The Fed has taken a number of steps to avoid this to happen again, such as slowing down the speed of its pull down and establishing new liquidity facilities, while providing more guidance on the factors it watches. But it has struggled to offer a lot of guidance about when it can stop QT, except to say that day does not seem imminent.
Over the past few days, some banks have pushed their QT Endgame estimates back in relation to the latest consensus, which eyeed the June stop date.
“Recent communication suggests that the Fed is willing to let QT continue to run despite the potential for low visibility for reserve demand over the coming months due to debt limit dynamics,” Economists Goldman Sachs said in a report on Friday.
Bank forecasters said that while they had expected the Fed to wind up at the end of the second quarter, now they see that happening at the end of the third quarter, with the Treasury Bond running away stopping At the end of the second quarter and a mortgage run away by the third quarter.
Morgan Stanley's economists also kicked the QT Can down the road.