Fed Slows Treasury Runoff to $5 Billion Monthly Until Debt Ceiling Resolution

Starting April 1, the Federal Reserve will slow down how quickly it shrinks its balance sheet. It will reduce the monthly cap on Treasury securities that mature without being replaced from $25 billion to just $5 billion, while keeping the mortgage-backed securities cap at $35 billion. Chair Powell noted that even though the banking system still has plenty of cash reserves ($3.46 trillion), officials have seen some tightening in money markets. He stressed this slowdown won’t change their long-term balance sheet goals.

This decision is closely tied to the ongoing debt ceiling talks. Since the U.S. hit its debt limit in January, any delay in Congress reaching an agreement means more cash flows back into the financial system. This could artificially inflate reserves and hide important warning signs about when the Fed should stop reducing its balance sheet completely. These signals are vital to avoid problems like the 2019 funding crunch that happened when the Fed previously cut its balance sheet too much. Only one Fed official, Governor Christopher Waller, disagreed with this decision.

Experts point out that keeping a small $5 billion cap instead of stopping completely gives the Fed room to speed up reductions again after the debt ceiling issue is resolved. The Fed has been gradually decreasing its $6.8 trillion portfolio since June 2022, having already lowered the monthly cap from $60 billion to $25 billion in June 2024.