Key Highlights

• The Fed slowed the pace of quantitative tightening dramatically last week on debt ceiling concerns
• Waller’s dissent indicates disagreement over reserve abundance
• X-date forecasts in danger of being moved closer owing to tax collection uncertainty

Slight QT surprise

EXHIBIT #1: TGA DECLINE OFFSET BY RESERVE AND RRP INCREASES

^{Source: BNY Markets, Federal Reserve Board of Governors, Federal Reserve Bank of New York}

Last Wednesday, the FOMC materially slowed the pace of quantitative tightening. Cutting Treasury (QT) roll-off from $25bn per month to just $5bn. We had been expecting such a move at future FOMC meetings, but not necessarily the March meeting, even though we acknowledged that there was a nontrivial risk of such action (see here).

In a separate but related policy decision, the New York Fed announced additional Standing Repo Facility (SRF) operations would be conducted in the mornings from March 27 to April 2. Regular SRF operations have been and will continue to be conducted between 1:30 and 1:45 p.m. This follows New York Fed’s System Open Market Account (SOMA) manager Roberto Perli’s speech on the topic back on March 5. He suggested that a change to QT would likely be necessary at some point.

Our take

Together, these two policy changes suggest to us that the Fed is concerned that current inferences about the liability side of its balance sheet – which look flush at the moment – are being muddied by the ongoing debt ceiling dynamics. Recall that as the Treasury continues to spend down its General Account (the TGA), reserves increase, but when the ceiling is eventually resolved the rebuild of the TGA will cause a decline in reserves, at which time system-wide liquidity will reveal itself to be scarcer than it was pre-debt ceiling, hence a good time to slow balance sheet shrinkage.

As Exhibit #1 shows, the increase in reserves since February 5 (up nearly $300bn) has been not insignificant. The TGA has been run down by $370bn over that period. Furthermore, RRP balances have increased by over $100bn over the same timeframe. RRP take-up has risen in large part due to restricted T-bill supply as the Treasury cannot issue new debt and remain at the debt ceiling cap. Taken together, the increase in reserves and RRP, at $397bn total, is slightly above the decline in the TGA, but close enough to suggest that what the Fed fears is indeed happening.

While the public record doesn’t offer much evidence that conditions in funding markets have deteriorated much, Chair Powell, in his post-FOMC press conference, indicated that “we still think the reserves are abundant, but you begin to see some of the, some of the things we look at begin to react a little bit. But we still think that they’re abundant. Of course now, the TGA is emptying out, so reserves are higher now. So you can’t really see the underlying signal” (emphasis added). Something has suggested to the Fed that the “underlying signal” the Fed is worried about is indicative enough to require a slowdown in QT.

Governor Waller dissented on the balance sheet question, and in a post-FOMC statement on the Federal Reserve Board of Governors’ website, he argued that reserves – which have been above $3trn for over two years – are still abundant and not just merely ample. In his statement, Waller said, “There is no evidence from money market indicators or my outreach conversations that the banking system is getting close to an ample level of reserves.” Nevertheless, the majority of the Committee felt that the time had come to slow QT just in case.

Forward look

Congress has not yet moved forward on the debt ceiling issue, seemingly preferring to address it during the upcoming budgetary process. As it stands, as shown in Exhibit #2, with the TGA now below $400bn, and extraordinary measures close to being exhausted, the X-date is still subject to considerable uncertainty, especially because the mid-April income tax revenues are proving difficult to forecast. The Bipartisan Policy Center recently declared that it believes the X-date will likely arrive as early as mid-July, but “although it is quite unlikely, if collections from tax season fall far short of expectations, there is a potential for heightened X Date risk in early June ahead of quarterly receipts on June 15.” We expect that along with tariff uncertainty, this source of concern will start to attract more attention in coming weeks.

EXHIBIT #2: REMAINING EXTRAORDINARY MEASURES AND TGA

^{Source: BNY Markets, US Treasury Department}