New York Fed president says central bank not close to ending QT

NEW YORK — Recent developments on the Federal Reserve’s balance sheet have some officials and analysts eyeing the end of quantitative tightening efforts. But one Fed leader says not to expect policy changes anytime soon.

Federal Reserve Bank of New York President John Williams, in a speech delivered Wednesday, said he does not expect the central bank to slow its balance sheet reduction efforts anytime soon.

“In its plans, the [Federal Open Market Committee] said that to ensure a smooth transition, it intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves,” Williams said. “So far, we don’t seem to be close to that point.”

Since the summer of 2022, the Fed has been allowing Treasuries and mortgage-backed securities on its balance sheet to expire without replacing them as part of its push to make monetary conditions tighter. Currently, the Fed is allowing $95 billion of assets to rolloff monthly, which has led to a commensurate reduction in its liabilities. In total, the balance sheet is down roughly $1.3 trillion from peak in the spring of 2022. 

Williams oversees the Federal Reserve’s System Open Market Account, or SOMA, which is housed at the New York Fed. He also serves as vice chair of the FOMC. In his speech, he noted that the balance sheet reduction has gone smoothly and has shown no signs of crimping the supply of reserves — funds held by commercial banks at the Fed. 

“The decline in securities holdings has been absorbed almost entirely by a drop in the overnight reverse repurchase agreement facility,” Williams said. “As a result, aggregate reserve balances are little changed from their levels in mid-2022, when balance sheet reduction started.”

Fed officials have often referred to the facility, also known as the ON RRP, as an indicator of excess liquidity in the banking system. Money market funds and other counterparties use the ON RRP to place securities at the Fed overnight in exchange for a nominal return the following day.

Use of the facility has plummeted from more than $2 trillion — a level it maintained from June 2022 to June 2023 — to less than $700 billion this week. Yet, the ON RRP has shrunk faster than the Fed’s overall balance sheet in response to other factors, including an uptick in Treasury bill issuance as well as the private repurchase agreement, or repo, market. 

This accelerated draw down has some analysts calling for the Fed to start the process of slowing its balance sheet reduction sooner than previously anticipated, in an effort to avoid creating reserve scarcity. 

Dallas Fed President Lorie Logan, who previously managed the SOMA at the New York Fed, said recent fluctuations in funding rates indicate that reserves are already less plentiful. While the system as a whole still has more than enough reserves, she noted that they are not distributed equally. 

Williams said the Fed will continue to monitor reserve levels closely as the year goes on.

“Looking ahead to this year, as the balance sheet continues to shrink and usage of the ON RRP continues to decline, we will closely monitor money market conditions and the demand for reserves,” he said.