Analysts: Federal Reserve May Announce End of Balance Sheet Reduction Next Week

Key TakeawaysWrightson ICAP economists say the Fed may announce an end to its bond reduction plan next week.Signs of funding pressure in the repo market could accelerate the decision.Fed Chair Jerome Powell previously signaled he was waiting for the “right time” to halt balance sheet runoff.The Fed may begin buying Treasuries to offset maturing mortgage bonds and stabilize liquidity.The shift to a neutral policy stance could reduce short-term Treasury supply by about $20B per month.Economists at Wrightson ICAP believe the Federal Reserve could announce the end of its balance sheet reduction program at next week’s policy meeting amid signs of funding pressure in the repo market.Fed Chair Jerome Powell hinted earlier this month that officials were waiting for an appropriate time to pause quantitative tightening (QT). The recent volatility in repo rates may serve as a key signal prompting the decision.According to Wrightson ICAP, the Fed is also expected to purchase U.S. Treasuries to replace maturing mortgage-backed securities, maintaining a stable balance sheet and ensuring sufficient liquidity in money markets.As the Fed transitions to a neutral policy stance, the supply of short-term Treasury bonds circulating in the market could decrease by around $20 billion per month, helping ease funding stress but also tightening collateral availability.