Bank of America The continued decline in the size of the system's reserves has sparked widespread market attention regarding whether the Federal Reserve is about to end quantitative tightening (QT).
According to the latest weekly report from the Federal Reserve, as of the week ending October 22, banks... System reserves fell by about $59 billion to $2.93 trillion, the lowest level since January of this year, marking the eighth consecutive week of decline.
Analysts say the continued decline in reserves is becoming a significant factor constraining the Federal Reserve's balance sheet reduction process. Since the lifting of the US debt ceiling in July, the Treasury has increased its issuance of Treasury bonds to rebuild cash reserves, further pressuring liquidity. With the overnight reverse repo balance nearing zero, bank reserves are under passive pressure, and liquidity has tightened significantly.
Reserve requirements plummet, market bets on QT termination
Several Wall Street firms believe that reserve requirements are nearing a "safe floor," and further quantitative tightening could disrupt the short-term funding market. JPMorgan Chase... Bank of America , TD Securities Strategists such as Wrightson Research expect the Federal Reserve to announce a halt to its reduction of its approximately $6.6 trillion balance sheet as early as this month's meeting. Previously, this process was anticipated to continue until December or early next year.
Many institutional strategists believe that if the Federal Reserve continues to shrink its balance sheet, it may exacerbate the volatility of dollar funding rates. Therefore, with reserves continuing to decline, ending QT early becomes the option to minimize risk.
The market expects the Federal Reserve to clarify its balance sheet policy direction at next week's interest rate meeting. While a 25 basis point rate cut is considered highly probable, opinions on Wall Street remain divided regarding whether to simultaneously terminate QT (Quick Transfer). TD Securities and Mizuho Financial... Group analysts have moved their forecasts forward to October, while Goldman Sachs... With Barclays It is still believed that the Federal Reserve may choose to end the process later this year or early next year.
The liquidity withdrawal process is nearing its end.
Quantitative tightening began in mid-2022, aimed at removing excess liquidity from the financial system. Over the past two years, the Federal Reserve's balance sheet has shrunk from a peak of nearly $9 trillion to approximately $6.6 trillion. With rising Treasury funding needs and falling short-term interest rates, the liquidity "buffer" in the banking system has significantly thinned.
Analysts believe that reserve requirements have fallen to a "technical threshold" of around $3 trillion, and if they continue to decline, it could trigger abnormal fluctuations in money market interest rates.
In a report, Bank of America's strategy team stated that if signs of funding shortages emerge in the financial system, the Federal Reserve may prioritize "ending balance sheet reduction ahead of schedule to stabilize reserve supply and market expectations."
With declining reserves and shrinking reverse repo balances, the quantitative tightening cycle may be nearing its end. The market widely believes that the Federal Reserve will signal the end of QT at this meeting, leaving more room for maneuver in the coming months of interest rate cuts.
(Article source: CBN)
