Fed's Powell says the end of balance sheet drawdown process may be nearing

Core Viewpoint - The Federal Reserve may be approaching the end of its quantitative tightening (QT) efforts, as indicated by tightening liquidity conditions and monitoring various economic indicators [1][2][3]. Group 1: Quantitative Tightening (QT) Overview - QT has been ongoing since 2022, aimed at removing excess liquidity injected during the COVID-19 pandemic through large-scale purchases of Treasury and mortgage bonds [7]. - The Fed's reverse repo facility (RRP), which peaked at $2.6 trillion at the end of 2022, has seen near-zero usage recently, signaling a potential end to QT [4][5]. Group 2: Liquidity Conditions - Powell noted signs of gradually tightening liquidity conditions, including a firming of repo rates and temporary pressures on specific dates [3]. - The reduction of reserves due to QT could lead to unexpected liquidity scarcity, complicating the Fed's ability to maintain its interest rate target [5]. Group 3: Historical Context and Tools - The Fed had to intervene unexpectedly during the last QT phase in September 2019 to add liquidity back to the system, leading to the establishment of the Standing Repo Facility as a liquidity buffer [6]. - The current monetary policy interest rate target is set between 4% and 4.25%, with the RRP tool helping to maintain this target [4].