Fed's New Tool Signals Confidence: Quantitative Tightening May Stretch to 2025

According to the first monthly indicator released by the New York Federal Reserve, the U.S. banking system's reserve levels remain robust. This new measure, known as the reserve demand elasticity indicator, showed that as of October 11, banks continue to hold a sufficient level of reserves.

This data serves as a fresh piece of evidence that the Federal Reserve can proceed with its quantitative tightening plan, reducing liquidity from the financial system. Strategists on Wall Street, such as Joseph Abate of Barclays, expected this outcome and believe it implies the Fed could sustain quantitative tightening until 2025.

"The Federal Reserve appears to be employing this new tool to predict reserve scarcity levels," stated Gennadiy Goldberg, Head of U.S. Rates Strategy at TD Securities. He noted that from a risk-reward perspective, it is sensible for the Fed to approach further balance sheet reductions with caution.

Since 2022, the Fed has been actively reducing its asset holdings, gradually increasing the amount of maturing U.S. Treasury securities and mortgage-backed bonds it refrains from reinvesting. The peak monthly reduction reached up to $95 billion, and starting in June, the reinvestment of maturing U.S. Treasuries was cut from $60 billion to $25 billion each month.