As discussions on when the Federal Reserve will end its current quantitative tightening (QT) policy continue to heat up on Wall Street, market strategists are hoping to get more guidance from today's release of the Fed minutes.

Although most market observers currently predict that the Federal Reserve will completely end its balance sheet reduction at some point later this year, that is, pause the reduction process, the specific timing is still far from certain. Therefore, the newly released minutes of the Federal Reserve's July meeting are expected to attract attention and may also provide more clues about the future direction of interest rates by the Federal Reserve.

The increased interest in the topic of balance sheet reduction is partly due to a series of research reports released by the New York Federal Reserve in the past week on the implementation of monetary policy and bank reserve balances, with these research topics being key to when quantitative tightening policy can finally end.

Steven Zeng, Deutsche Bank's US rate strategist, said that this may be a signal released by the Federal Reserve decision-makers as they approach the end of the quantitative tightening program.

He said, "They (the Federal Reserve) released these reports, possibly in response to recent discussions about repurchase agreements and calls for ending QT. These studies did not appear out of thin air."

Since June 2022, the Federal Reserve has been reducing the size of its assets, during which time the Federal Reserve's balance sheet has cumulatively decreased by about $1.7 trillion and now stands at about $7.2 trillion.

Starting from June this year, the Federal Reserve has decided to reduce the monthly maximum reduction in US Treasury holdings from $60 billion to $25 billion. This measure is partly aimed at alleviating potential pressure on money market interest rates.

It is worth mentioning that in the past, the Federal Reserve has used the July window several times to announce important new tools related to the money market. For example, in July 2013, the committee discussed the implementation issues of the overnight reverse repurchase agreement mechanism (RRP) of the Federal Reserve, which is an indicator of whether the financial system liquidity is excessive; in July 2021, they introduced the Standing Repo Facility (SRF) for domestic and foreign enterprises.

This time, market participants will pay special attention to any discussion updates in the minutes regarding bank reserve balances. Federal Reserve policymakers have indicated that they still believe the current reserve level is ample, but there are concerns about whether this level can be maintained if the QT policy continues.

Concerns about liquidity tightening have emerged.

Earlier this month, the amount of overnight repurchase agreements by the Federal Reserve dropped below $300 billion, while overnight repo rates remained high during typical mid-month and end-of-month periods, indicating primary dealers are struggling to digest a large amount of Treasury supply.

Gennadiy Goldberg, the Director of US Rate Strategy at TD Securities, said, "People seem to be paying more attention to the size of reserves. This suggests that reserves will be more important in the Federal Reserve's policy considerations than in recent months, and it also implies that the Federal Reserve may discuss the appropriate level of reserves at the upcoming FOMC meeting, and the days of quantitative tightening may be numbered."

Although the current amount of bank reserves held at the Federal Reserve is still around $3.3 trillion, there are still concerns in the market about the liquidity of the US financial system and the potential cracks in the Federal Reserve's balance sheet before it is reduced to a certain level, similar to the situation that occurred after the tapering of the balance sheet five years ago.

Zeng stated that Wall Street is currently hoping that policymakers can explain whether the development of government bond issuance and the record level of primary dealer positions have affected their QT plans.

Editor/ping