According to the minutes of the Federal Reserve's October meeting, "almost all" officials were in favor of halting the balance sheet drawdown on December 1.
The markets were taken aback by the early pause because they had anticipated a much later conclusion. There was only one member who disagreed and wanted to cease right away.
Stephen Miran, the governor of the Fed, affirmed that he was the only person calling for an immediate stop to QT. As shown by rising short term rates and banks using Fed lending facilities, the Fed said that QT had already sufficiently restricted liquidity.
According to a September New York Fed study, QT would not finish until early 2026. Even so, it was anticipated that the Fed's bond holdings would approach $6.2 trillion, or roughly where the balance sheet is now.
After bond purchases during the epidemic increased the balance sheet to $9 trillion, QT started in 2022. Total holdings have decreased to roughly $6.6 trillion as a result of allowing Treasuries and MBS to roll off, although they are still significantly higher than pre COVID levels.
In order to control liquidity, officials hinted that certain Treasury purchases would soon restart, emphasising that these actions are technical rather than policy driven. For greater flexibility, policymakers are also thinking about moving more assets into short term T bills.
Some Fed officials are concerned that the larger balance sheet would cause market distortion. Jeffrey Schmid, president of the Kansas City Fed, supported discontinuing QT despite cautioning that it impacts duration pricing and blurs the distinction between monetary and fiscal policy.
According to Beth Hammack, president of the Cleveland Fed, the balance sheet is the right size for a system with "ample reserves."
Large reserves are advantageous because they provide zero settlement and liquidity risk, according to former NY Fed President Bill Dudley.
If bank restrictions are loosened and bank balance sheets become flexible enough to accommodate a reduced Fed footprint, Miran thinks future reductions are feasible. He views the end of QT as a brief interlude till then.
The size of the balance sheet is still politically problematic. While some worry about inflation threats, Treasury Secretary Scott Bessent claims it confuses markets.
Additionally, the Fed has lost almost $240 billion as a result of controlling interest rates, which has caused remittances to the Treasury to be delayed.
The Fed's QT pause represents a significant change away from drastically reducing the balance sheet and toward stabilising liquidity.
The question of how big is "too large" is still up for dispute, but for the time being, authorities choose financial stability over quick tightening.
