Wall Street banks push back expected end of Fed balance sheet drawdown
By Michael S. Derby
NEW YORK (Reuters) — Wall Street's biggest banks shifted ahead of last month's Federal Reserve meeting toward predicting the U.S. central bank would end its balance sheet reduction process later this year than previously thought, according to a survey released on Thursday by the New York Fed.
Banks, referred to as primary dealers, now believe the process known as quantitative tightening, or QT, will end in the fourth quarter, according to a poll taken ahead of the Fed's Dec. 12-13 policy meeting. In the primary dealer survey done ahead of the policy meeting that ended on Nov. 1, the banks collectively viewed the third quarter as the stopping point for QT.
If the dealers are right, the Fed's balance sheet will contract to $6.75 trillion from the current level of about $7.764 trillion. The dealers also predicted ahead of the December meeting that there would be $375 billion in the central bank's reverse repo facility when QT ended, versus the expected $625 billion in the October survey.
In the December survey, respondents said they expected bank reserves to be at $3.125 trillion at the end of QT, versus $2.875 trillion in the prior poll.
The QT process has complemented the rate hikes delivered by the Fed as part of its effort to lower inflation back to its 2% target. The central bank aggressively bought Treasury bonds and mortgage-based securities at the start of the coronavirus pandemic in the spring of 2020, causing its overall holdings of cash and bonds to more than double to around $9 trillion by the summer of 2022. The Fed has been shrinking its holdings since last year, but has not given much guidance about how long the process will play out.
Minutes from the Fed's meeting last month, which
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