Fed Chair Powell Signals Continued Balance Sheet Reduction
During Congressional testimony, Federal Reserve Chairman Jerome Powell has indicated that the central bank's quantitative tightening (QT) process is ongoing with no immediate end in sight.
QT Progress and Lack of Liquidity Impact
The Fed has reduced its balance sheet by over $2 trillion since starting QT. Powell noted that there are no signs of reduced market liquidity impacting the Fed's reduction pace of Treasury and mortgage bonds.
QT Goals and Risks
The Fed's QT aims to reduce liquidity and stabilize market volatility. However, it is working to avoid a repeat of 2019 when excessive liquidity reduction led to market disruptions.
Extension of QT Timeline
Despite previous estimates of a June end date for QT, some banks have revised their projections due to uncertainty in reserve demand. Goldman Sachs and Morgan Stanley now anticipate QT to continue until the third quarter, with Treasury bond reduction ending in the second quarter and mortgage reduction in the third.
Fed's Cautious Approach
Powell emphasized that the Fed is monitoring indicators carefully but declined to provide a specific end date for QT. The central bank remains committed to a gradual and data-driven approach to balance sheet normalization.