Ahead of US FOMC Decision: "Limited Impact from End of QT...Focus on Additional Policies"

On October 28, Hana Securities stated that the United States Federal Reserve's decision to end its Quantitative Tightening (QT) would have only a limited impact on the market. Instead, the company analyzed that attention should be focused on additional "balance sheet normalization" policies, including the reduction of the maturity of U.S. Treasury Securities (UST), following the end of QT.

Yonhap News Agency

Park Junwoo, a researcher at Hana Securities, made this statement in a report titled "Policies After QT That Matter More Than QT Itself," released ahead of the Federal Open Market Committee (FOMC) monetary policy meeting scheduled for two days starting today. He noted, "The end of QT is expected within this year."

First, Park explained, "As of October, the Fed's reserves stand at around 2.9 trillion dollars, slightly below 10% of Gross Domestic Product (GDP), indicating that the end of QT is imminent." He added, "With the federal government shutdown dragging on, the Treasury General Account (TGA) balance at the U.S. Treasury has increased to 950 billion dollars due to tax inflows, accelerating the pace of reserve depletion. Conditions in the funding market are also showing signs of tightening, as reflected in the rise of the Effective Federal Funds Rate (EFFR) and the Secured Overnight Financing Rate (SOFR)."

He noted that, with the end of QT approaching, some in the market have raised the possibility of so-called "not-QE" measures. However, he assessed, "The likelihood of this materializing is low, as safety nets such as the Standing Repo Facility (SRF) are in place." "Not-QE" is an unofficial term referring to policies that resemble Quantitative Easing (QE) but are not officially QE. He continued, "The end of QT is already known to the market and will have only a minimal impact. It is reasonable to interpret it merely as a factor that could heighten expectations for an easing cycle."

Accordingly, Park emphasized the need to pay attention to additional policies after QT ends, such as replacing Mortgage-Backed Securities (MBS) with Treasury securities and reducing the maturity of held Treasuries. He explained, "Balance sheet normalization must consider size, composition, and maturity. QT is only the first stage." He added, "If the proceeds from maturing MBS are reinvested in (short-term) Treasuries, it could have a positive effect on Treasury supply and demand." He also pointed out, "The average remaining maturity of Treasuries held by the Fed is 9.0 years, which is more than three years longer than the average for all Treasuries (5.9 years). To align maturities, a reduction of 1.5 trillion dollars on a 10-year equivalent basis is needed, which could exert upward pressure of about 30 basis points on long-term interest rates."

Furthermore, he reiterated that the "MBS-to-UST replacement" and "maturity reduction" policies, which are part of balance sheet normalization, could have a greater impact on interest rates. He diagnosed, "Depending on how these two policies are implemented, it will become clearer whether the Fed's independence is being compromised." He explained that, since the Donald Trump administration seeks to stabilize long-term interest rates, it is highly likely to oppose the Fed's maturity reduction policy. He added, "If MBS proceeds are reinvested in Treasuries but reinvestment in long-term Treasuries is not reduced, there is significant room to interpret this as strong political pressure to keep long-term interest rates low."