Drops in a bucket

Question: When might the reduction of the Fed's balance sheet have a meaningful impact on the liquidity markets?

Susan Hill: The Fed started the process of reducing its balance sheet in June of this year in incremental steps for the first three months. In September, it plans to double the pace of quantitative tightening, so it will reduce its balance sheet holdings of treasury and agency mortgage securities by 95 billion dollars per month, going forward. While those numbers sound like they're big, in the context of a 9 trillion dollars balance sheet, we think it will take some time before the influence appears in the liquidity markets.

Susan Hill: The Fed will be watching closely for the impact of this enhanced quantitative tightening on the markets going forward as it reduces its presence in the markets at large. In the front end of the yield curve, we look for the benefit of enhanced supply. So supply for direct securities that we purchase or supply of collateral that we use for repurchase agreements and look forward to the day when conditions at the front end are a little more balanced between demand and supply.