"Money is tight" signals frequently appear, Wall Street believes that the Federal Reserve will release signals to end the reduction of its balance sheet this month.

Currently, multiple Wall Street analytical institutions predict that the Federal Reserve may announce the termination of its asset balance sheet reduction plan that has been ongoing for several years at the end of this month's meeting. Observers point out that due to increased friction in the money market that may affect the achievement of the dual goals of inflation and employment, the quantitative tightening (QT) policy is facing a significant turning point. Analysts believe that by terminating QT at the Federal Open Market Committee (FOMC) meeting on October 28th to 29th, it will help ensure the smooth operation of monetary policy at a technical level. "We expect the FOMC to terminate the securities reduction plan at this month's meeting," Wrightson ICAP analysts stated in a report. While they have doubts about whether there has been substantial liquidity stress in the money market, recent volatility in the short-term funding market "has clearly served as a sufficient warning signal to support the Fed's entry into the next phase of policy normalization." The forecast team at Evercore ISI stated on Monday, "We believe the Fed may signal the end of QT at the October meeting in order to complete the exit before year-end liquidity pressure. However, the actual termination may be delayed one or two months after the official announcement." Analysts at Jefferies told clients, "We expect the Fed to completely terminate QT at the end of this month's next meeting." However, they also mentioned that due to the weakness in the real estate market environment, the reduction process of mortgage-backed securities has been very slow, and the Fed may still allow these securities to naturally expire at the current pace. This policy expectation shift comes from recent market turmoil: several financial institutions unexpectedly utilized the Fed's repo facility (which provides quick cash loans with bonds held as collateral for financial institutions), leading to an increase in key short-term borrowing rates. Additionally, the rise in repo rates and the Secured Overnight Financing Rate (SOFR) also confirms the existence of market friction. Meanwhile, the Fed's core rate target - the federal fund rate has been continuously probing within the 4%-4.25% target range. It is worth noting that at the time of the recent market fluctuations, Fed Chairman Powell stated in a speech on October 14th that QT may be terminated in "the coming months." Although he echoed statements from other Fed officials, saying the financial system still maintains ample liquidity. Fed Governor Waller said in a speech in New York on Thursday that, measured by the size of bank reserves, "We are close to a point where the financial system liquidity reaches a reasonable level." An end to the QT process may be drawing near. The purpose of the QT plan was to withdraw the liquidity injected into the market during the Covid-19 pandemic in 2020. At that time, to stimulate the economy and stabilize the bond market, the Fed made large-scale purchases of US Treasury bonds and mortgage-backed securities to lower long-term interest rates. The scale of this round of bond purchases launched in the spring of 2020 was huge, causing the Fed's total asset holdings to increase to $9 trillion by the summer of 2022, more than doubled from before. Since then, the Fed has reduced its holdings by allowing a certain amount of bonds to expire without reinvestment, and the total asset size has now dropped to $6.6 trillion. The Fed has previously stated that its goal is to maintain sufficient liquidity in the financial system to effectively control short-term interest rates and respond to normal fluctuations in the money market. However, the challenge the Fed faces is the difficulty in determining "how much removal of liquidity will lead to uncontrolled market gyrations," making it difficult for Wall Street to accurately predict the end time of QT. Jefferies analysts wrote in a report, "The volatility in the money market is driven by multiple factors, with the Fed's balance sheet policy being one of them. Specific reasons include special factors such as tax payment dates, settlement of treasury auctions, and an expansion in the issuance of short-term treasury bills; but the main factor remains the Fed's ongoing process of balance sheet normalization." However, due to the difficulty in accurately determining the "appropriate size of liquidity in the money market according to Fed standards," some opinions believe that there is still room for a continuation of QT. Especially now that bank reserve levels have remained stable, and QT has mainly consumed excess liquidity in the Fed's reverse repo facility. Data shows that while bank reserves have decreased, they have remained close to the $3 trillion level for some time. Goldman Sachs forecast team stated after Powell's speech, "We now expect the FOMC to announce at the January meeting that the balance sheet plan will end in February," significantly earlier than the previous expectations for the end of the first quarter.