Fed Considering Slowing Pace of Balance Sheet Reduction to Ease Financial Conditions

The Fed is considering slowing the pace of reducing its balance sheet ("quantitative tightening" or "QT") as a way to ease financial conditions while still fighting inflation.

QT has shrunk the Fed's balance sheet by $1.5 trillion over the past 2 years, at a pace of $100 billion per month, which acts to push up long-term interest rates.

Officials want to avoid the volatility that happened last time the Fed wound down its balance sheet at the end of the 2010s.

The Fed could start slowing QT once the overnight reverse repurchase facility (ON RRP) is nearly out of cash, indicating ample liquidity in money markets.

Some officials say balance sheet adjustments will be independent of interest rate cuts, while others expect no decision on it this week but see a slowing of QT pace as possible soon.