According to a report by JPMorgan strategists, including Teresa Ho, the Federal Reserve is now expected to halt its quantitative tightening efforts by the end of the first quarter of 2025, rather than at the end of 2024. This change in expectation comes after liquidity conditions normalized towards the end of October.
The increased supply of U.S. Treasury bills and repos, alongside a shift by money market funds towards longer-term investments due to diminished easing expectations, has resulted in more funds being withdrawn from the Fed's overnight reverse repurchase agreements. Currently, interest rates are significantly lower than the reserve balance rate of 4.65%, contrary to the scenario projected by Dallas Fed President Lorie Logan, who anticipated higher rates when liquidity became less abundant.
The strategists suggest that although quantitative tightening may continue beyond the year's end, it likely won't extend far into 2025. This is because bank reserves have remained stable at $3.2 trillion, with limited room for further declines in reverse repo balances. Furthermore, Wrightson ICAP predicts the Federal Reserve will only seriously consider adjusting the pace of quantitative tightening by mid-2025.
