Citi: Waller to Cautiously Advance Fed's Balance Sheet Reduction

According to a report by Jinse Finance, Citi strategists stated that Federal Reserve Chair nominee Waller is likely to adopt a gradual approach to reducing the Fed's $6.6 trillion asset portfolio to avoid reigniting tensions in the money markets. Any attempt to restart balance sheet reduction could once again put pressure on the $12.6 trillion repo market. Citi strategists noted: "Given the severe volatility experienced by the repo market last year, the threshold for restarting QT is quite high. It can be speculated that the FOMC would prefer a gradual approach." However, under Waller's leadership, the Fed still has multiple ways to reduce its asset holdings. The path of least resistance might involve converting maturing long-term Treasury securities into short-term debt, thereby shortening the weighted average maturity of its holdings. Alternatively, the Fed could opt to scale back its current monthly $40 billion Treasury bill purchases or even halt them entirely. Other options include allowing its holdings of mortgage-backed securities to mature naturally. Citi expects policymakers to reduce bond purchases to approximately $20 billion per month starting in mid-April and to maintain this pace through the end of the year.