There are still huge amounts of excess money and credit sloshing around.
From Wolf Street, October 22:
QT continues. Liquidity is “more than ample.” Money market spreads widening briefly is OK. Selling MBS and shifting from longer-term Treasuries to T-bills is on the table.
Lorie Logan, president of the Dallas Fed, is a leading voice on the technicalities of the Fed’s balance sheet and QT. Prior to the current job, she was an executive VP of the New York Fed, managing the System Open Market Account (SOMA) which handles the operations of the Fed’s securities portfolio. Her hawkish commentary on Monday about the future of QT, the balance sheet composition, and liquidity contributed to roiling the bond market, with longer-term yields and mortgage rates spiking to multi-month highs.
She was the one who said in January 2024 that QT would eventually drain Overnight Reverse Repos (ON RRPs) to near zero, from over $2.3 trillion at the peak, which was a shock for lots of folks because it implied far bigger QT than they’d feared.
ON RRPs are a way for money market funds and other counterparties to deposit excess cash at the Fed and get paid interest on it. She said when they “eventually approach zero,” it would be time to slow the pace of QT. In March, with ON RRP balances plunging apparently straight toward zero, Logan became more detailed and explained why QT should slow when ON RRPs approach zero: “Moving more slowly can reduce the risk of an accident that would require us to stop too soon,” she said.
In May, with ON RRPs down by about $2 trillion and still plunging, the FOMC announced that it would slow QT starting in June. But then, ON RRP stopped their descent for a while and then slowly zigzagged lower, and are currently at $238 billion (see chart of ON RRPs below this article in the comments).
Reserves (cash that banks put on deposit at the Fed and get paid interest on) have started to finally drop a little. Bringing reserves down from “abundant” to merely “ample” has been the purpose of QT all along. But after two years and nearly $2 trillion of QT, reserves are still considered “abundant.”
On Monday, she gave another speech on the balance sheet, titled “Normalizing the FOMC’s monetary policy tools” – at the Securities Industry and Financial Markets Association annual meeting. Here are the salient points on the future of QT and the balance sheet.
QT will continue despite rate cuts. QT and “gradually lowering the policy rate toward a more normal or neutral level” are both part of monetary policy normalization, she said, and added:
“Normalizing the fed funds rate means bringing it down from the elevated levels that were needed to restore price stability and returning to a level that will be consistent with sustaining maximum employment and price stability over time.”
“Normalizing our balance sheet means bringing our asset holdings down from the elevated quantity that was necessary to support the economy during the pandemic and returning to a balance sheet size that will be consistent with implementing monetary policy efficiently and effectively.”
Liquidity is still “more than ample.” The purpose of QT is to reduce liquidity from “abundant” to “ample.” Since no one knows where “abundant” ends and “ample” begins, Logan is looking at clues that money markets are giving off....
....MUCH MORE
If interested see also Wolf Street via Climateer Investing, February 23:
"The Fed Wants to Drive QT as Far as Possible Without Blowing Stuff Up, and it’s Working on a Plan: FOMC Minutes"
