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2025-10-28 17:33:17
[The Federal Reserve's $6.6 trillion balance sheet faces a critical turning point] ⑴ The Federal Reserve will decide at this week's meeting whether to immediately stop the three-year balance sheet reduction. The current size is $6.6 trillion, which has shrunk significantly from the peak of nearly $9 trillion in 2022. ⑵ Pressure in the overnight funding market has intensified beyond expectations, pushing the benchmark interest rate close to the upper limit of the target range of 4%-4.25%, indicating that the liquidity of the banking system is declining. ⑶ The money market fund deposit buffer facility is almost exhausted, shrinking significantly from the peak of $2.2 trillion in 2023, resulting in a monthly balance sheet reduction of $20 billion that directly consumes bank reserves. ⑷ Decision-makers need to seek a balance between political costs and market stability. The lessons of the interest rate surge caused by excessive withdrawal of liquidity in 2019 have made officials particularly cautious about the timing of exit. ⑸ Although there is an option to continue the balance sheet reduction until the end of the year, institutional analysts warn that continued contraction will marginally increase the risk of overnight loan interest rate fluctuations and the actual benefits will be limited.
