(Bloomberg) — The Federal Reserve will maintain the pace at which it’s reducing bond holdings, even as officials said it will be appropriate to slow the pace of the unwind fairly soon.
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The Fed has been winding down its holdings since June 2022 — a process known as quantitative tightening — gradually increasing the combined amount of Treasury and mortgage bonds it allowed to run off without being reinvested to a total of $95 billion per month. That consists of $60 billion for Treasuries and $35 billion for mortgage bonds.
Chair Jerome Powell said during the post-meeting press conference the central bank’s plan to eventually stop shrinking its balance sheet will be consistent will previously issued plans.
“The decision to slow the pace of runoff does not mean our balance sheet will shrink, but allows us to approach that ultimate level more gradually,” he said. “In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility of money markets experiencing stress.”
Read More: The Fed Has a Lot of Questions to Answer About Its Balance Sheet
Market participants are wondering how much more officials can shrink the $7.5 trillion portfolio of assets before worrisome cracks — similar to those seen in 2019 ahead of an acute funding squeeze — start to appear. But for now, short-term funding markets have been stable and stress free. That offers considerable flexibility and a positive backdrop as Fed officials consider the path ahead for quantitative tightening, or QT.
Usage of the overnight reverse repurchase agreement facility — a barometer of excess liquidity in the financial system — climbed on Wednesday to $496 billion, the highest since March 13 from $447 billion the prior session.
Read More: Envisioning the End of Fed’s Quantitative Tightening: QuickTake
(Adds comments from Chair Powell beginning in second paragraph.)
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