Any US Fed balance sheet unwinding may be disorderly

Subject

US Federal Reserve policy.

Significance

The US repurchase agreement (repo) rate, the interest rate on overnight loans backed by Treasury securities to facilitate a range of transactions, suddenly soared above 5% on September 15, 2019. There were immediate effects across financial markets, but the Federal Reserve (Fed) quickly bought up Treasury bills and the repo rate returned to the Fed’s 2.00-2.25% target range. However, concerns linger about whether a spike could recur. The Fed has increased its balance sheet by more than 10% since September but sees this as a temporary adjustment rather than a policy change.

Impacts

• Having narrowed to 3.7 trillion dollars by August 2019, the Fed’s balance sheet could pass its 4.4-trillion-dollar record this year.
• The Fed will seek to ensure its has enough resources for corporate-tax payment dates but without increasing its holdings indefinitely.
• Increasing the size of the Fed’s balance sheet could limit the effectiveness of further balance sheet expansion in a future crisis.