Fed officers weighed slowing or pausing bond drawdown final month

By Michael S. Derby

(Reuters) – Uncertainty over how the U.S. Treasury will handle debt issuance over the following few months drove some Federal Reserve officers to ponder at their final coverage assembly slowing or pausing the continued drawdown of their steadiness sheet till larger readability arrives.

Fed officers, in minutes of the central financial institution’s January 28-29 Federal Open Market Committee assembly launched on Wednesday, flagged the problem of getting a clear learn on market liquidity as the federal government wrangles over spending plans amid a legally mandated borrowing cap that can have an effect on how the Treasury Division manages its money.

“Concerning the potential for vital swings in reserves over coming months associated to debt ceiling dynamics, varied members famous that it could be applicable to think about pausing or slowing steadiness sheet runoff till the decision of this occasion,” the minutes famous.

Fed officers had already been bracing for a interval of uncertainty attributable to authorities monetary administration and had signaled in current assembly minutes it will be onerous to know whether or not monetary markets had sufficient or too little liquidity. The difficulty is vital to the Fed’s ongoing effort to scale back its Treasury and mortgage bond holdings, in a course of referred to as quantitative tightening, or QT.

QT has to this point shaved simply over $2 trillion off Fed holdings, from a peak of $9 trillion in 2022. Fed officers have considered the method as largely technical and whereas it was began amid Fed fee hikes, officers have lengthy argued that their bond- holding drawdown has little measurable affect on the monetary system.

That stated, Fed officers are unsure the place to cease QT and are carefully taking a look at a variety of market liquidity measures to gauge when the method ought to come to an finish. Fed Chair Jerome Powell famous final week that “I feel we have now a methods to go” on QT.

However on the identical time, dropping the power to learn the market will increase the chance of overshooting on QT, which may convey undesirable volatility to cash markets. That seems to be influencing a minimum of some Fed officers’ considering, at the same time as the final word endgame for QT stays unsure.

(Reporting By Michael S. Derby and Dan Burns; Enhancing by Andrea Ricci)