Fed's reverse repo facility drawdown looms large in balance sheet debate

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Fed's reverse repo facility drawdown looms large in balance sheet debate
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NEW YORK, Oct 31 - The eventual end of the Federal Reserve’s efforts to reduce its vast bond holdings increasingly appears tied to what happens with the central bank's"reverse repo" operations.

They are also looking at the other piece of the puzzle, bank reserves. Those have held steady between $3.0 trillion to $3.4 trillion since the central bank kicked off its"quantitative tightening" effort, or QT, and it's unclear how much shrinkage the Fed can engineer there given banks' desires to keep a lot of liquid cash on hand.

REPO REDUCTION The current size of the Fed’s balance sheet is around $8 trillion, down about $1 trillion from its peak last year as the central bank allowed about $100 billion per month in bonds to mature from its portfolio without being reinvested. But if reverse repos stick at $1 trillion, Wells Fargo said there will be swifter decline in reserves which would likely lead the Fed to slow the drawdown a year from now and end it at the close of 2024.

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