Fed winding down balance sheet contraction amid tightening money markets

Core Points - The Federal Reserve is ending the drawdown of its balance sheet due to tightening money market liquidity conditions and declining bank reserve levels [1][4] - Starting December 1, the Fed will roll over maturing Treasury securities instead of allowing up to $5 billion to mature each month without replacement, while continuing to allow up to $35 billion in mortgage-backed securities to expire monthly but reinvesting proceeds into Treasury bills [2][3] - The Fed's decision to halt balance sheet runoff was anticipated due to rising borrowing costs in short-term lending markets [5][6] Group 1 - The Federal Open Market Committee reduced the fed funds rate by a quarter percentage point, bringing it to a range of 3.75% to 4.00% [3] - Federal Reserve Chair Jerome Powell indicated that the Fed has reached a level of reserves consistent with ample conditions in money markets [4] - Recent developments suggest that the Fed has sufficient liquidity in the financial system to maintain control over interest rate targets while allowing for normal volatility in money market rates [7] Group 2 - The end of the balance sheet runoff occurred sooner than many market participants expected, with a prior survey indicating a first-quarter stopping date for quantitative tightening (QT) [8] - The Fed is cautious about removing too much liquidity from the system to avoid losing control of the fed funds rate, as experienced during the previous QT six years ago [9]