After being left reeling by the unexpected money market crisis during its first round of quantitative tightening (QT1), the Federal Reserve (Fed) intends to manage the reduction of its balance sheet better. This means destroying some of the reserves held by banks at the Fed without triggering a shortage in central bank money, given the liquidity requirements imposed on banks. Since the start of its second round of quantitative tightening (QT2) on 1 June 2022, the reallocation of money market funds holdings, outside of the Fed’s reverse repo facility (USD -1.38 trillion as at 8 May 2024), has helped to absorb the effects of the reduction in the Fed’s balance sheet (USD -1.56 trillion) on bank reserves (USD -30 billion), thereby delaying the risk of a central bank money shortage. However, the liquidity pool that will be able to absorb the QT2 shock is now smaller (money market funds’ “deposits” in the Fed stood at 460 billion on average in early May).

Given how difficult it is to estimate the optimal amount of reserves1 required for the money markets to operate smoothly, the Fed is being extra careful. On the one hand, it announced that it would reduce its balance sheet at a slower pace starting from 1 June.2 On the other hand, it has revised its analytical framework. From now on, it characterises an «ample» reserves system as one with a reserve-to-GDP ratio slightly above the level recorded in September 2019 (8% in the first scenario), or even more (10% in the second scenario). The Fed believes that in order to avoid a shortage in reserves, QT2 should be curtailed, in the case of the high scenario, in early 2025. By that time, the central bank’s balance sheet should be around USD 6.5 trillion (22% of GDP) and reserves should be around 3.4 trillion (11% of GDP). At the end of a year in which the Fed’s balance sheet size is expected to remain stable, the asset purchase programme would be reactivated in order to keep the stock of reserves at 10% of GDP.

fxsoriginal

Download The Full Eco Flash

BNP Paribas is regulated by the FSA for the conduct of its designated investment business in the UK and is a member of the London Stock Exchange. The information and opinions contained in this report have been obtained from public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, they are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. No BNP Paribas Group Company accepts any liability whatsoever for any direct or consequential loss arising from any use of material contained in this report. All estimates and opinions included in this report constitute our judgements as of the date of this report. BNP Paribas and their affiliates ("collectively "BNP Paribas") may make a market in, or may, as principal or agent, buy or sell securities of the issuers mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in the issuers mentioned in this report, including a long or short position in their securities, and or options, futures or other derivative instruments based thereon. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any issuer mentioned in this report. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any issuer referred to in this report. BNP Paribas, may to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas may receive or intend to seek compensation for investment banking services in the next three months from an issuer mentioned in this report. Any issuer mentioned in this report may have been provided with sections of this report prior to its publication in order to verify its factual accuracy. This report was produced by a BNP Paribas Group Company. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations. Analyst Certification Each analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the analyst's personal views about any and all of the issuers and securities named in this report, and (ii) no part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein. United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer, to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. BNP Paribas Securities Corp. accepts responsibility for the content of a report prepared by another non-US affiliate only when distributed to US persons by BNP Paribas Securities Corp. United Kingdom: This report has been approved for publication in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas London Branch is regulated by the Financial Services Authority ("FSA") for the conduct of its designated investment business in the United Kingdom and is a member of the London Stock Exchange. This report is prepared for professional investors and is not intended for Private Customers in the United Kingdom as defined in FSA rules and should not be passed on to any such persons. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions permitted by regulation. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a subsidiary of BNP Paribas, is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is regulated as a Licensed Bank by the Hong Kong Monetary Authority and is deemed as a Registered Institution by the Securities and Futures Commission for the conduct of Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance Transitional Arrangements. Singapore: This report is being distributed in Singapore by BNP Paribas Singapore Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Singapore is a licensed bank regulated by the Monetary Authority of Singapore is exempted from holding the required licenses to conduct regulated activities and provide financial advisory services under the Securities and Futures Act and the Financial Advisors Act. © BNP Paribas (2011). All rights reserved.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD hovers around 1.0500 on softer US Dollar demand

EUR/USD hovers around 1.0500 on softer US Dollar demand

EUR/USD gained modest upward traction and trades around 1.0500 in the American session on Thursday. In the absence of high-tier data releases, improving risk mood makes it difficult for the US Dollar (USD) to find demand and helps the pair push higher.

EUR/USD News
GBP/USD rebounds from daily lows, bullish potential limited

GBP/USD rebounds from daily lows, bullish potential limited

After falling toward 1.2600 on disappointing macroeconomic data releases from the UK, GBP/USD gathered modest strength and advanced beyond 1.2650. The US Dollar, however, is recovering the ground lost and aiming to close the week in the green. 

GBP/USD News
Gold pierces $2,660, upside remains capped

Gold pierces $2,660, upside remains capped

Gold (XAU/USD) puts pressure on daily lows and trades below $2,660 on Friday’s early American session. The US Dollar (USD) reclaims its leadership ahead of the weekly close, helped by rising US Treasury yields. 

 

Gold News
Bitcoin and Ripple stalls while Ethereum eyes rally

Bitcoin and Ripple stalls while Ethereum eyes rally

Bitcoin faces resistance near $101,100, hinting at a potential downturn. At the same time, Ethereum eyes a rally if it can firmly close above $4,000, and Ripple holds support at $1.96, with a breakdown signaling a possible decline.

Read more
Can markets keep conquering record highs?

Can markets keep conquering record highs?

Equity markets are charging to new record highs, with the S&P 500 up 28% year-to-date and the NASDAQ Composite crossing the key 20,000 mark, up 34% this year. The rally is underpinned by a potent mix of drivers.

Read more
Best Forex Brokers with Low Spreads

Best Forex Brokers with Low Spreads

VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.

Read More

Majors

Cryptocurrencies

Signatures