The Federal Reserve (Fed) may have lopped more than US$1 trillion off its balance sheet but it’s difficult to envisage a scenario where its bond holdings return to anywhere near pre-pandemic or pre-2008 levels.
AS the amount of cash parked at the Federal Reserve’s (Fed) overnight reverse repo facility (ON RRP) hurtles towards zero, the Fed’s visibility on the minimum level of bank reserves needed to ensure the financial system functions smoothly also diminishes.
Much as central banks want to convince markets that unwinding bloated balance sheets are about as riveting as watching paint dry, restive bond markets show there may be more drama and sensitivity than they’d like to let on.