Federal Reserve Navigates Economic Challenges Amid Quantitative Tightening and Rate Cuts

Federal Reserve Chair Jerome Powell indicated that high liquidity levels permit continued balance sheet shrinkage alongside rate cuts. During a press conference, he addressed quantitative tightening and its impact. Powell also noted that market conditions will guide the end of quantitative tightening, despite current easing measures.

Federal Reserve Chair Jerome Powell announced on Wednesday that robust liquidity levels in the financial system allow the central bank to continue shrinking its balance sheet despite cutting interest rates. Speaking at a press conference after a monetary policy meeting, Powell emphasized, "Reserves are still abundant and are expected to remain so for some time."

Amid ongoing rate cuts to counter inflation, Powell discussed the Fed's quantitative tightening (QT) strategy. This entails reducing liquidity gained from bond purchases during the pandemic, trimming overall holdings from $9 trillion at its peak to $7.2 trillion currently. This drawdown, slowed earlier this year, involves letting up to $60 billion in Treasury and mortgage bonds expire monthly without replacement.

Powell acknowledged the role of the Fed's reverse repo facility in managing excess liquidity, noting that reserves have stayed around $3 trillion since June 2022 while reverse repo inflows dropped significantly. Despite rate cuts, Powell highlighted the QT process as ongoing, with officials watching market signals to determine when liquidity might tighten excessively.

(With inputs from agencies.)