Wall Street Zeroes In On Just How the Fed Might Drain Liquidity
- Analysts are split on where the Fed unwind will appear first
- A decline in bank reserves could curtail how long QT goes on
The Marriner S. Eccles Federal Reserve building in Washington, D.C.
Photographer: Stefani Reynolds/BloombergWall Street analysts have been busy war-gaming just how quickly the Federal Reserve might start shrinking its balance sheet. Now attention is also turning to exactly which parts of the financial system it could suck the most liquidity from as it reverses its pandemic-era stimulus.
That matters because it could determine how disruptive the so-called quantitative tightening process is to financial markets as well as how long it might go on for. If and when the Fed starts to shrink its balance sheet -- whether by simply not replacing maturing securities or outright asset sales -- there will be an increase in the amount of Treasuries in search of a home. Most of these are likely to be hoovered up by banks or money-market funds, which in turn will need to reduce the amount of cash they have parked in different ways at the Fed in order to purchase them.