Fed To Shrink Balance Sheet At Slower Pace Until Debt-Ceiling Deal Reached

The Federal Reserve said it will shrink its balance sheet at a slower pace beginning April 1 until the federal government can strike a deal on the debt ceiling.

Officials, who left interest rates unchanged on Wednesday, said they’ll lower the cap on how much in Treasuries is allowed to mature without being reinvested to $5 billion from $25 billion. It will leave the cap on mortgage-backed securities unchanged at $35 billion.

The central bank has been winding down its holdings since June 2022 — a process known as quantitative tightening, or QT — by gradually increasing the combined amount of Treasuries and mortgage bonds it allowed to run off without being reinvested. It last lowered its monthly cap in June 2024 to $25 billion from $60 billion. 

The latest move comes as lawmakers look to strike a deal on the debt ceiling, the statutory limit for outstanding Treasury debt. The US hit that limit in January. 

The longer it takes Congress to either suspend or lift the limit, the more cash that will make its way back into the financial system. That has the potential to artificially boost reserves — currently $3.46 trillion — masking money-market signals that could indicate when is the right time to stop QT.

It’s those money-market signals that will dictate just how much more the Fed would be able to shrink its $6.8 trillion portfolio of assets before worrisome cracks start to appear, as they did in 2019 ahead of an acute funding squeeze. 

For months, officials had said very little publicly about when they might stop reducing the their balance sheet. Minutes of their January meeting, however, revealed policymakers had discussed the potential need to pause or slow the process until lawmakers can strike a deal over the government’s debt ceiling. 

The New York Fed’s Roberto Perli, who oversees the central bank’s securities portfolio, reiterated these concerns during remarks earlier this month.