New York Fed: Liquidity remains ample, no urgent pressure for Fed to stop shrinking balance sheet.

According to the data released by the New York Fed on Thursday, the Federal Reserve currently does not have immediate pressure to stop reducing its holdings of Treasury securities and mortgage-backed securities. The latest data shows that as of January 7th, the New York Fed's new "Reserve Demand Elasticity" indicator remains relatively stable with a reading of -0.04, consistent with recent data. The report stated, "This estimate indicates that reserves are still plentiful." For the Federal Reserve, ample reserves mean that the financial system has sufficient liquidity, allowing it to continue reducing its balance sheet by not reinvesting in maturing Treasury and mortgage bonds. This process began in 2022 and is known as Quantitative Tightening (QT). Since the peak of around $9 trillion in the Federal Reserve's balance sheet in the summer of 2022, it has now been reduced to slightly under $7 trillion. Federal Reserve officials have been uncertain about how far the balance sheet reduction can continue. In order to avoid a situation similar to the unexpected liquidity drain in the fall of 2019, which forced interventions by the central bank, the Federal Reserve has learned lessons from it. The "Reserve Demand Elasticity" indicator helps measure liquidity conditions and provides early warning of potential shortages. The Federal Reserve has also slowed the pace of the balance sheet reduction and established a Standing Repo Facility to provide rapid cash support to eligible banks in case of market problems. Although Federal Reserve officials acknowledge the uncertainty about the future of the balance sheet reduction, they do not appear to be in a rush to change policy direction at the moment. John Williams, President of the New York Fed, said at a press conference on Wednesday that the transition period from the end of 2024 to 2025 has been "very smooth." He pointed out that this period may be volatile for the market. He stated that he has not seen any signs of reserve levels reducing to the point of affecting the Federal Reserve's control of the federal funds rate, its primary economic control tool. Williams said, "I can't predict when the balance sheet reduction will end." However, he also stressed that the Federal Reserve has taken measures to reduce the likelihood of an abrupt end to the balance sheet reduction. Wall Street's expectations for the end of the balance sheet reduction are being pushed back. A market survey by the New York Fed shows that large banks expect the balance sheet reduction to end in June, a slightly longer timeline than previously expected. However, Barclays analysts believe that the timeline for the end of the balance sheet reduction may be even longer. Barclays analysts wrote in a report, "Determining the end time of the balance sheet reduction is like calculating 'the number of angels that can dance on the head of a pin,' it is an endless debate with little practical significance." The report noted that as the December Federal Reserve meeting minutes did not mention the balance sheet reduction, Barclays has pushed back their expectation for the end of the balance sheet reduction to September. The end of the balance sheet reduction may depend on further reductions in the size of the Federal Reserve's reverse repurchase agreement tool, which has been gradually decreasing. Once this goal is achieved, bank reserves may decrease from their current relatively stable levels. A survey conducted by the New York Fed on banks previously indicated that when the balance sheet reduction ends, the Federal Reserve's reserve size is expected to decrease from the current $3.3 trillion to around $3.125 trillion, and the total balance sheet will be reduced to $6.375 trillion.