"Powell's Repo Crisis Haunts Fed's Balance Sheet Cut"

Federal Reserve Chair Jerome Powell admits that the central bank was caught off guard by the impact of shrinking its balance sheet in 2019, which led to problems in the repo market. As the Fed aims to cut its balance sheet, economists and strategists warn that quantitative tightening (QT) remains complex and unpredictable. The Fed is currently shedding its bond holdings at a faster pace than in 2019, but so far, things have been going smoothly. However, the full impact of QT is yet to be felt, and market participants are closely monitoring the situation. The Treasury's bill sales and the funding of the reverse repo facility will play a crucial role in determining the effects of QT. The Fed has policy tools available to address challenges, but the lowest comfortable level of reserves in the financial system remains uncertain.