Barclays(US:BCS) Sou Hu Cai Jing·2026-02-10 23:36Group 1 - The core viewpoint is that the transition to a smaller Federal Reserve balance sheet requires close coordination between the central bank and the Treasury to avoid excessive market volatility [1] - The normalization of the balance sheet is expected to be a multi-year process, with potential risk premiums demanded by investors during the transition [1][3] - The Federal Reserve's balance sheet peaked at approximately $8.9 trillion in June 2022, significantly expanded from $800 billion two decades ago, and is projected to decrease to $6.6 trillion by November 2025 [1] Group 2 - Barclays notes that the Federal Reserve could reduce its balance sheet by stopping the Reserve Management Purchases (RMP), but this may lead to renewed funding pressures [2] - To achieve meaningful balance sheet reduction, the demand for reserves by banks must be lowered, with current bank reserves at $2.94 trillion and a suggested reduction in the reserve ratio from 12% to 8-9% [2] - An alternative approach involves reinvesting maturing long-term government bonds and mortgage-backed securities into short-term government debt, which requires close coordination with the Treasury to avoid increasing long-term bond issuance costs [2] Group 3 - Both proposed outcomes are not ideal for the Treasury, and the Federal Reserve may ultimately need to lower policy rates to counteract the tightening market environment [3] - Significant balance sheet reduction is feasible, provided that the Federal Reserve and the Treasury have clear and aligned objectives to stabilize market expectations [3]