Fed's Hidden Move: Key Rate Adjustment Could Extend QT into 2025

Beyond the anticipated policy rate cut, the Federal Reserve is poised to make a significant technical adjustment to its market operations by reducing the reverse repo facility rate to 4.25%, eliminating a pandemic-era safety margin. This strategic move serves multiple purposes: it helps manage pressure on overnight repo rates, facilitates the transition of funds from the reverse repo facility to bank reserves, and could extend quantitative tightening into 2025. The Fed has been carefully managing its balance sheet reduction, slowing from an initial rapid pace to a more measured $25 billion monthly Treasury runoff. The timing is particularly relevant given year-end funding pressures and the Fed’s broader goal of maintaining “ample” rather than “abundant” reserves. This adjustment, discussed in November’s meeting minutes, reflects the Fed’s ongoing efforts to fine-tune market liquidity and avoid the type of funding shock that occurred in September 2019, though some analysts, like Lou Crandall at Wrightson ICAP, suggest the Fed might delay the change until January to separate it from other policy decisions.



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