Fed’s Powell: Balance Sheet Rundown Will Continue As Is for Now, According to Reuters

By Michael S. Derby

NEW YORK – Federal Reserve Chair Jerome Powell stated on Wednesday that there is no intention to alter the current approach to reducing the central bank’s extensive balance sheet.

During a press conference, Powell indicated that the Federal Open Market Committee (FOMC) is not contemplating a change in the pace of balance sheet runoff. "It’s not something we’re discussing or considering," he emphasized.

Powell acknowledged that while the reduction of Fed holdings might have a minimal effect on real-world borrowing costs, "it’s hard to argue that reserves are anywhere near scarce at this point."

His comments followed a meeting in which Fed officials maintained the overnight interest rate target range at 5.25% to 5.5%, consistent with the rate since late July. He noted that Fed officials are keeping the option to raise rates in play, with decisions regarding the federal funds rate to be made "meeting by meeting."

Powell also noted that the central bank is likely "close to the end of the cycle" regarding rate increases. This prospect has sparked discussions on whether the Fed should consider tapering its process of allowing nearly $100 billion in Treasury and mortgage bonds to mature each month without replacement.

The central bank’s aim is to decrease its holdings and withdraw the liquidity it injected into the economy during the pandemic, a period in which the balance sheet size more than doubled to a peak of almost $9 trillion last summer.

Fed officials have repeatedly asserted that the balance sheet reduction complements rate hikes and operates in the background. However, a growing number of market participants speculate that the runoff process could conclude sooner than anticipated.

Key to this perspective is the swift decline in the Fed’s reverse repo facility, which permits money market funds and other entities to park cash at the Fed. This tool is seen as an indicator of excess liquidity and has diminished significantly in recent weeks, dropping from consistent inflows exceeding $2 trillion per day to just above $1 trillion recently.

Some Fed officials and private sector analysts believe that a complete drainage or stabilization of the reverse repo facility will result in lower reserve levels, which could then lead to a halt in the drawdown process.

The Fed aims to maintain reserves at a level sufficient to ensure robust market liquidity and strong central bank control over short-term interest rates. Loretta Mester, president of the Cleveland Fed, recently expressed her view that the balance sheet reduction could extend for another year and a half to two years.