The Federal Reserve Bank of New York has confirmed that the central bank’s balance-sheet runoff, also known as quantitative tightening (QT), is advancing steadily, despite stress tests and potential financial market strains. Roberto Perli, manager of the System Open Market Account at the Federal Reserve Bank of New York, made the announcement on Tuesday.
Over the past 18 months, the Fed has raised the benchmark federal funds rate by over five points and offloaded more than $1 trillion in bond holdings. An additional quarter-point increase is projected by the end of 2023, although this may be moderated by rising Treasury yields. QT has also reduced cash reserves at the Fed’s reverse repo program to $1.3 trillion from $2.55 trillion at the end of 2022.
Perli addressed these issues while speaking at a National Association for Business Economics event. He outlined the Fed’s strategy to gradually halt bond shedding to keep banking system reserves above ample levels amid transition uncertainties. The Fed has let nearly $1 trillion in Treasury and mortgage-backed securities acquired via aggressive stimulus efforts during the pandemic mature without replacement since last year, draining liquidity from the financial system and increasing short-term rates.
Predicting when reserves will become scarce, a scenario that complicates rate control as seen in September 2019’s reserve shortage, remains a challenge. Nevertheless, despite investor uncertainty, rapid policy rate hikes, federal debt limit suspension, significant precautionary liquidity demand from banks, and a swift increase in short-term government debt due to the pandemic, the Fed has maintained control of rates using tools like the Standing Repo Facility.
Federal Reserve officials are closely monitoring money-market conditions for signs of stress and intend to slow and stop balance-sheet reduction while reserves are still above “ample” levels. The Fed’s market monitoring incorporates price signals as well as extensive market outreach and intelligence. Perli assumed this role from Dallas Fed President Lorie Logan.
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