As per a Bloomberg report, Citi strategists said the Fed could also opt to decrease the pace of its T-bill purchases from about $40 billion a month currently, or stop them altogether.
- Any attempts from the apex bank to restart unwinding its balance sheet could renew pressures in the $12.6 trillion repurchase market, as per Citi.
- Other options include letting its holdings of mortgage-backed securities roll off, as per the strategists.
- The FOMC in October announced that it is concluding quantitative tightening.
The Federal Reserve Chair nominee Kevin Warsh will likely take a gradual approach to shrinking the central bank’s $6.6 trillion portfolio to avoid rekindling money market tensions, Citi reportedly said.
According to a report from Bloomberg that cited Citigroup Inc. strategists, any attempts from the apex bank to restart unwinding its balance sheet could renew pressures in the $12.6 trillion repurchase market.
The Federal Reserve Open Market Committee (FOMC) in October announced that it is concluding quantitative tightening (QT) that marked an end to the massive central bank intervention in the market, which it unveiled at the start of the COVID-19 pandemic in March 2020.
Additional Details
“The bar for restarting QT is quite high given the large volatility that repo markets experienced last year,” strategists Alejandra Vazquez Plata and Jason Williams wrote, as per the report.
The strategists noted that the Fed might choose to slow its purchases of Treasury bills from the current rate of about $40 billion per month, or even halt them completely. Another possibility is allowing its mortgage-backed securities holdings to mature without replacement.
Warsh On Shrinking Fed’s Portfolio
Warsh, previously a Federal Reserve governor, has urged a significant reduction in the central bank’s financial role, which expanded rapidly due to multiple asset purchase programs during the global financial crisis and the Covid-19 pandemic.
In June 2022, the Fed’s balance sheet reached a high of $8.9 trillion, rising from $800 billion nearly twenty years earlier.
Market Reaction
U.S. equities ended in green on Monday. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up by 0.06%, the Invesco QQQ Trust ETF (QQQ) also rise 0.11%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) was almost flat in extended hours of trading
Retail sentiment around SPY trended in the ‘bearish’ territory amid ‘high’ message volumes.
The iShares 7-10 Year Treasury Bond ETF (IEF) was up by 0.02% at the time of writing.