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📝See the Fed Halting QT By Mid-2023: UBS

Expect the Fed to halt QT by mid-next year due to complications stemming from money-market reform efforts and the debt limit. Another aggravating factor includes the relatively sticky use of the Fed’s reverse repurchase agreement facility.

Regarding the debt limit, as the government approaches its $31.4 trillion cap, the Treasury will draw down its cash pile, boosting bank reserve balances “but only temporarily.” Once the debt ceiling is raised or suspended, Treasury will boost bill supply and replenish its cash balance, moves that will rapidly drain reserves.

This high volatility of reserves risks a repeat of September 2019 when there were important money-market disruptions and spikes in repo rates. Because the draining of reserves will be masked by the Treasury, and the potential sizable volatility that will result, we expect that prudent management of the banking system and funding markets would lead the Fed to halt balance-sheet runoff sometime around June 2023

- UBS


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