The Fed’s Shrinking Balance Sheet Is Worrying a Key Corner of US Financial Markets
- Recent funding-market squeeze stirs up liquidity concerns
- Powell signals reserves are adequate, says QT to continue
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As markets staged a monster rally following the Federal Reserve’s shift toward loosening monetary policy, one corner of the financial system had reason to remain on edge.
For participants in the overnight funding markets — a key conduit for bank borrowing and linchpin for determining interest rates — Wednesday’s policy meeting contained a more pertinent message from Chair Jerome Powell than the one that sent stocks soaring and pushed the 10-year US yield below 4%: namely, that the Fed’s balance sheet reduction would continue as planned.