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Fed’s Change Occurs Amid Signs of Tightening Liquidity and Decline in Bank Reserves, According to InfoMoney.
The Fed (Federal Reserve), the central bank of the United States, announced on Wednesday (29) a significant change in its monetary policy. The institution will end the reduction of its balance sheet, currently at US$ 6.6 trillion, starting on December 1. The decision, reported by InfoMoney, signals a new phase in the management of liquidity in the American economy.
This announcement coincides with the Federal Open Market Committee’s (FOMC) decision to reduce the interest rate by 0.25 percentage points, setting it in the range of 3.75% to 4.00%. The measure to halt the balance sheet reduction (known as “quantitative tightening” or QT) was widely expected by analysts, reflecting growing pressure on liquidity conditions in money markets.
Why Did the Fed Decide to Stop the Reduction Now?
The Fed’s decision was not made in a vacuum. It directly responds to clear evidence that liquidity conditions in the money market have begun to tighten. As detailed by InfoMoney, important indicators showed signs of stress. In recent days, the benchmark interest rate has moved to the upper end of its target range, while other short-term borrowing rates have also recorded increases.
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One of the most technical and closely watched signals was the reactivation of the “Standing Repo Facility” of the Fed. This facility, which serves to provide quick liquidity (cash loans) against Treasury securities, saw intense activity again after nearly years of dormancy. On Wednesday, it registered the highest usage ever, indicating that banks are actively seeking short-term liquidity, a classic sign that the system is “drying up.”
For Fed watchers, these events indicate that the central bank is approaching the point where there is sufficient liquidity in the financial system. The goal is to enable authorities to maintain firm control over their interest rate target while allowing normal levels of volatility in money market rates.
What Changes in Practice on December 1?
The most immediate change will be in the management of Treasury securities. Until now, the Fed allowed up to US$ 5 billion of these securities to mature each month without being replaced, pulling money out of the system. Starting on December 1, this policy changes: the central bank will fully roll over maturing Treasuries, meaning it will reinvest the total amount to keep its government securities stock stable.
The strategy for mortgage-backed securities (MBS) will also be adjusted. The Fed will maintain its plan to allow up to US$ 35 billion in MBS to mature monthly, a target that, according to InfoMoney, has never been reached in over three years of reductions. However, there is a crucial change: starting in December, all matured yields from these mortgage securities will be reinvested in Treasury securities. This represents a change in the composition of the central bank’s assets.
The Context of Quantitative Tightening (QT)
The balance sheet reduction program, known in the market as Quantitative Tightening (QT), had a clear objective: to remove the enormous amount of liquidity that the Fed injected into financial markets during the peak of the Covid-19 pandemic. This liquidity injection was an emergency measure to support the economy during the health crisis.
As a result of this support effort, the Fed’s holdings (assets) more than doubled. The balance sheet, which was at levels seen at the beginning of 2020, surged to a peak of US$ 9 trillion in mid-2022. The QT, which will now be halted, was the movement initiated to normalize this massive balance sheet, gradually removing monetary stimulus from the economy.
Do you agree with this change? Do you think it impacts the market? Leave your opinion in the comments, we want to hear from those who experience this in practice.
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