Quantitative tightening will loosen a bit, the Federal Reserve announced Wednesday, even as it left its benchmark interest rate unchanged at a range of 5.25% to 5.50% for its policymaking panel’s sixth straight meeting.
The Federal Open Market Committee lowered the ceiling on the amount of Treasury securities rolling off its balance sheet by almost 60%, to $25 billion each month from $60 billion, starting in June. The FOMC kept the pace of runoffs for mortgage-backed securities at $35 billion monthly, and will reinvest principal from maturing MBS into Treasuries, rather than back into MBS, which are expiring more quickly than expected on their own.
QT, shrinking the amount of Fed holdings, dials back stimulus to economic growth, which has been robust enough in the eyes of the Fed. This is the opposite of the earlier policy of quantitative easing, buying Treasuries and MBS, to bolster the economy as the Fed also hiked interest rates to fight surging inflation.
The Fed began reducing its balance sheet—by allowing securities to mature and not reinvesting the proceeds—in mid-2022. The balance sheet dropped to $7.4 trillion in April 2024 from $8.9 trillion in June 2022. In January 2020, right before the pandemic took hold, the Fed held $4.1 trillion. From then it expanded as the central bank bought Treasury bonds and MBS to pump cash into the economy.
Minutes of the FOMC’s March meeting showed policymakers wanted to be cautious about QT, in light of market turbulence in 2019—the last time the Fed shrank its portfolio.
The Fed has not indicated just how long the QT process will continue this time and at what level of holdings it will settle. A recent New York Fed report said the QT process could continue into mid-2025, with the balance sheet landing at around $3 trillion. “This adjustment doesn’t mean QT is ending anytime soon, only that a smoother ride is likely,” wrote Jack McIntyre, portfolio manager at Brandywine Global, in an analysis of the Fed’s meeting.
In his congressional testimony last week, Federal Reserve ChairJerome Powell restated that the Fed is in no hurry to cut rates until it is sure it has tamed inflation. With a strong economy and labor market, the Fed has the flexibility to see whether inflation is headed back to policymakers’ 2% goal before slicing rates.
Tags: balance sheet, Federal Reserve, FOMC, Jerome Powell, MBS, quantitative tightening, Treasuries