The move would be needed to bridge a funding gap as banks scramble for scarce reserves, according to analyst Zoltan Pozsar.
That would mean a shift from purchasing short-term Treasury debt and expanding into longer duration and more aggressive balance sheet expansion.but instead an effort to keep its benchmark overnight funds rate within the 1.5%-1.75% target range. In addition to the outright purchases, the Fed is conducting daily repurchase operations to stabilize the market.
"The Fed's liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn," he said, adding that investors have become complacent after an initial flare-up in 2018 turned out to be "benign" and as "repo rates have been trading normally since the September blowout" and amid the Fed's efforts to keep reserves plenty.
Prior to the balance sheet rundown, the Fed had been running what it considered an "ample reserves" regime, where reserves a year ago had been around $1.8 trillion. That number dropped close to $1.4 trillion in September, and the Fed has wrestled since with what is the right number. While there remain concerns on how the Fed calibrates the right level of reserves, most fixed income experts think thehave kept the market running smoothly. Indeed, the funds rate for the past month has been trading at 1.55%, which is near the bottom end of the target range. The Fed usually is satisfied if the rate trades around the midpoint, which would be about 1.62%.
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