Debt ceiling gloom looms over Fed tapering "pumping the brakes"?

After the release of the minutes of the January policy meeting last week, the market's expectations for the Federal Reserve's balance sheet reduction process diverged. The minutes showed that policymakers believed that pausing or slowing the reduction of the balance sheet until the issue of the US federal debt ceiling is resolved may be appropriate. It is understood that in January of this year, the US government reached its statutory debt limit, and since then the US Treasury has been taking so-called "extraordinary measures" to continue issuing most of its bonds. The monetary market conditions may be unstable for a period of time, increasing the risk of the Federal Reserve withdrawing liquidity excessively, which is not what Fed officials want to see and has opened the door to a shift in the quantitative tightening process. Analysts at Wrightson ICAP said, "We believe that the Federal Open Market Committee (FOMC) will lean towards 'slowing down' the overall pace of balance sheet reduction, rather than completely stopping it." Barclays analysts insist that quantitative tightening will end in September or October, and point out that "pausing quantitative tightening at the March or May meetings may not make sense, as it may only be a temporary restart, and end asset reduction in September or October." They said, "We believe the concerns expressed in the January FOMC meeting minutes may not be about bank reserve levels, but about the speed of reserves declining from August to October." Analysts at research company LH Meyer said, "If not restarted, suspending balance sheet reduction may turn into a complete stop. Restarting balance sheet reduction could be tricky, especially if the debt ceiling event damages market confidence." They said this means that quantitative tightening will slow down during the resolution of the debt ceiling issue. The Federal Reserve continues to reduce its bond holdings. Federal Reserve officials have been concerned that the actions of the US federal government in managing finances will make it difficult for the Fed to get clear market signals about whether liquidity is sufficient. The Fed slowed down the pace of reducing liquidity last year to ensure a gradual approach to the final stage. The Fed has been trying to determine to what extent quantitative tightening policies can be implemented without causing excessive volatility in the money market or undermining its control over the federal funds rate. The federal funds rate is the Fed's primary monetary policy tool. Fed officials have recently pointed out that they still have room to continue implementation, and the latest market liquidity situation shows no need to stop quantitative tightening. A survey of major banks and fund managers conducted before last month's policy meeting showed that respondents expected quantitative tightening to stop in June or July, by which time the Fed's asset size would peak at around $9 trillion in 2022 and fall to $6.4 trillion, currently around $6.8 trillion. It is expected that by the end of quantitative tightening, reserves will decrease from the current $3.3 trillion to $3.125 trillion, and the estimated size of the Fed's reverse repo tool will be $125 billion. The reverse repo tool is an indicator of excess liquidity. However, the size of the reverse repo tool for the whole of February has been consistently below $100 billion.