"Fed Mouthpiece": The Fed may consider suspending balance sheet reduction to deal with debt ceiling risks

On March 19th, news came that Federal Reserve officials will consider adjusting the policy of reducing the $6.8 trillion asset holdings on Wednesday. Over the past three years, the Federal Reserve has been reducing the investment portfolio of U.S. Treasury bonds and mortgage-backed securities accumulated in the early stimulus plans, including the stimulus measures taken in 2020 to stabilize the market disrupted by the COVID-19 pandemic. The Federal Reserve is trying to avoid a repeat of the situation in 2019, when it was also reducing its balance sheet. At that time, the reduction of the balance sheet led to tightness in the overnight funding market, forcing the Federal Reserve to change its policy and expand the balance sheet. Due to the interplay between the Federal Reserve's balance sheet reduction and the need for Congress and the White House to raise the federal debt ceiling, the possibility of market volatility in the coming months will increase. At the most recent meeting held in January, Federal Reserve officials discussed the risks posed by raising the U.S. debt ceiling, namely that it could too quickly deplete reserves from the system. Meeting minutes show that officials discussed slowing down or pausing the balance sheet reduction for a few months so that the debt ceiling would not affect the Federal Reserve's ability to fine-tune its balance sheet. Blake Gwinn, interest rate strategist at RBC Capital Markets, said Federal Reserve officials could pause the reduction of reserves until several months after the debt ceiling is raised and the Treasury rebuilds its cash balance. By that time, the Federal Reserve can continue to resume reducing reserves on its own terms.