By Michael S. Derby
NEW YORK (Reuters) – The Federal Reserve’s efforts to reduce its balance sheet will likely continue until 2025 before the procedure is completed, with the final outcome depending on the monetary system’s need for liquidity, the Federal Reserve Bank of New York said in a report on Wednesday.
“Future economic situations and their effect on reserve claims and the balance sheet are highly uncertain,” the bank said in its annual report to the central bank’s Open Market Account System, which holds Federal Reserve money and bonds primarily to conduct economic policy.
The Federal Reserve reduced its bond holdings in a procedure called quantitative tightening, or QT, to counter some of its large asset purchases that began at the start of the coronavirus pandemic in the spring of 2020.
Aggressive purchases of Treasuries and loan bonds, aimed at stabilizing markets and stimulating the economy, led the Federal Reserve to more than double its holdings, reaching $9 trillion in the summer of 2022. The QT procedure that began later that year reduced the Federal Reserve’s holdings to about $9 trillion. $7. 5 trillion.
Now that the Fed’s rate hike crusade is almost over, Fed officials and markets are debating when the central bank can prevent QT. Fed officials are considering a plan to particularly curb bond losses, up to $95 billion a month, in an effort to broaden the overall rate. procedure and lessen the threat of market disruption.
Fed officials gave no indication of when QT will be broken, saying only that they would like to see liquidity in the money sector succeed at a point that allows for overall volatility and allows the central bank to adjust its interest rate target. Major Banks Surveyed via New York Federal Reserve Advance Members of the Federal Open Market Committee’s March meeting were looking for a February 2025 breakout, with Federal Reserve holdings at $6. 25 trillion.
The New York Fed report indicates that if banks seek a higher reserve point, the Fed would possibly slow QT in the early part of this year, with QT closing in early 2025 with a balance sheet of $6. 5 trillion. If reserve requirements are reduced, QT may also decline in the first part of 2025 and, in all likelihood, end by mid-year with a balance sheet of $6 trillion, according to the report.
“These projections illustrate conceivable trajectories for the portfolio and reserves related to the dynamics that are likely to triumph in the coming years,” the report notes.
Federal Reserve officials are tracking a wide variety of cash market symptoms to detect when liquidity levels are tightening and so far see no noticeable symptoms of shortages in the monetary system. Federal Reserve officials also stated that there are no express measures pointing to a liquidity crisis.
As Fed officials approach the end of the quarter, they do so cautiously, to repeat the end of the last quarter period, in which the Fed withdrew too much liquidity from the monetary system, causing a lot of volatility in the market.
COUNTED LOSSES
The New York Federal Reserve also reported on its monetary outlook, revealing $948 billion in unrealized losses on its bond holdings last year. Negative net income, which has led to a paper loss of $163 billion, will continue this year before the Federal Reserve expects to return to profitability next year.
Losses on the Fed’s holdings do not reflect movements by the Fed because the central bank does not sell its holdings. At the same time, Fed officials are continually under pressure that overall losses in operations do not affect their ability to meet the goals set by Congress for the central bank.
(Reporting by Michael S. Derthrough; editing by Chris Reese, Richard Chang and Daniel Wallis)
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