Fed Chair Signals End to Quantitative Tightening is Near

Federal Reserve Chair Jerome Powell indicated that the end of quantitative tightening (QT) might be approaching, aiming to maintain sufficient liquidity in the financial system. QT began after the Fed's asset buying during COVID-19, and Powell warns against losing rate control powers vital for economic stability.

The Federal Reserve's ongoing quantitative tightening (QT) could be reaching its conclusion, according to Chair Jerome Powell. Speaking in Philadelphia at the National Association for Business Economics, Powell emphasized the Fed's commitment to maintaining liquidity levels essential for controlling short-term interest rates effectively.

Powell highlighted emerging signs of tightening liquidity, marked by firming repo rates and occasional pressures. The QT initiative, launched in 2022, aims to reverse the liquidity surplus from COVID-19 era bond purchases, which had doubled Fed holdings to around $9 trillion. This has been reduced to $6.6 trillion as bonds mature unevaluated.

Despite uncertainty over further shrinkage of Fed holdings, Powell reassured that ample liquidity persists, allowing QT to continue without destabilizing markets. He cautioned against removing the Fed's interest-paying mechanisms, which he asserted are critical for effective monetary policy and financial stability. Powell suggested future nimbleness in balance sheet use, informed by post-2020 experiences.

(With inputs from agencies.)