The Federal Reserve said it will shrink its balance sheet at a slower pace starting April 1 until the federal government is able to trade at its debt cap.
Officials who changed interest rates on Wednesday said they would lower the limit on the Treasury’s finances allowed to mature without being reinvested in the $25 billion to $5 billion. This will keep the mortgage assistance securities cap at $35 billion.
Central banks have been reducing their holdings since June 2022 by gradually increasing the process known as quantitative tightening, or QT, to gradually increase the total of the Treasury and mortgage bonds. Finally, in June 2024, the monthly cap was reduced from $60 billion to $25 billion.
The latest move comes as lawmakers aim to enter into contracts with debt caps and statutory restrictions on outstanding financial obligations. The US placed that restrictions in January.
The longer it takes Congress to suspend or lift restrictions, the more cash will return to the financial system. This could mean masking money market signals that could indicate when the right time is to stop QT could artificially mask reserves (currently $3.46 trillion).
