「Fed Whisperer」: The Fed is considering pausing balance sheet reduction to address the debt ceiling risk

BlockBeats News, March 19th, Nick Timiraos, a Wall Street Journal reporter known as the "Fed Whisperer," stated in a recent report that Federal Reserve officials will consider adjusting the policy of reducing the $6.8 trillion asset holdings on Wednesday. Over the past three years, the Federal Reserve has been reducing its portfolio of U.S. Treasuries and mortgage-backed securities accumulated in the early stimulus programs, including measures taken during the 2020 COVID-19 pandemic to stabilize disrupted markets.

The Fed is trying to avoid a repeat of the situation in 2019 when it was also shrinking its balance sheet. Back then, balance sheet reduction led to stress in the overnight funding market, forcing the Fed to change its policy and expand the balance sheet. The interplay between Fed balance sheet reduction and the need for Congress and the White House to raise the federal debt limit is likely to increase the possibility of market volatility in the coming months.

At the most recent meeting held in January, Fed officials discussed the risks posed by raising the U.S. debt ceiling, namely that it could too quickly draw too many reserves out of the system. Meeting minutes showed that officials discussed slowing down or pausing the balance sheet reduction for a few months so that the debt ceiling would not impede the Fed's ability to fine-tune its balance sheet.

Blake Gwinn, a rate strategist at RBC Capital Markets, stated that Fed officials could pause reserve reduction until several months after the debt ceiling is raised and the Treasury rebuilds its cash balance. At that point, the Fed could continue to resume reducing reserves on its own terms.