Fed to Halt Balance-Sheet Runoff at January Meeting, Set $6.5 Trillion Reserve Floor, Sources Say

Lead

WASHINGTON. The Federal Reserve will halt the runoff of Treasury and mortgage-backed securities holdings at its Jan. 28-29 policy meeting and establish a $6.5 trillion floor for reserve balances, according to two Fed officials familiar with the plan. The decision was finalized during the Dec. 16-17 Federal Open Market Committee meeting at the Eccles Building, and staff at the Federal Reserve Bank of New York have begun drafting operational instructions for the Open Market Desk, the officials said.

The Fed's total assets stood at $6.83 trillion as of Dec. 17. Under the plan, the central bank would allow the portfolio to fall by another $330 billion and then stop redeeming maturing securities, the officials said. The current monthly runoff caps, $25 billion for Treasury securities and $35 billion for agency mortgage-backed securities, would remain in place through January and then drop to zero at the start of February.

A trader at a primary dealer said dealers received informal guidance from New York Fed staff on Dec. 18 that the Jan. 7 release of the December meeting minutes would include language pointing toward an end to quantitative tightening. The trader, who spoke on condition of anonymity because the conversations were private, said the Desk has already begun modeling the reserve effects of stopping reinvestment in Treasury bills while maintaining the floor for overnight reverse repurchase agreements.

Decision at the December FOMC

The two Fed officials said the policy-setting committee reached consensus on the $6.5 trillion floor during a discussion of the manager's report on reserve conditions. One official said the staff projection showed that reserves would become scarce around $6.3 trillion, prompting the committee to set a buffer of roughly $200 billion above that level. The official said the decision was not included in the post-meeting statement because the committee wanted to avoid front-running the Jan. 7 minutes.

The officials said the plan also includes a technical adjustment to the standing repo facility. Starting Feb. 3, the minimum bid rate for the facility would rise by 0.05 percentage point to 4.40 percent, narrowing the spread over the bottom of the federal funds target range. An economist at a Wall Street firm said the adjustment is intended to discourage reliance on the facility as the Fed transitions to a floor system built around ample reserves.

The move would mark a milestone in the Fed's balance-sheet normalization, which began in 2022 and has reduced the portfolio by roughly $2 trillion. The central bank slowed the pace of Treasury runoff to $25 billion per month in mid-2024 and has since let maturing mortgage-backed securities roll off at a $35 billion cap. Ending runoff in February would leave the Fed holding about $4.5 trillion in Treasury securities and $2.1 trillion in mortgage-backed securities, one official estimated.

Market Mechanics and Wall Street Reaction

The trader at a primary dealer said the fixed-income desk repositioned overnight to add duration after hearing that runoff would end in February. Ten-year Treasury yields fell 7 basis points to 4.35 percent during afternoon trading on Dec. 18, and the December 2025 fed funds futures contract priced in a higher probability that the central bank would keep rates unchanged at the January meeting. The economist at the Wall Street firm said the balance-sheet shift could put downward pressure on long-term yields through the first quarter of 2026.

The plan also affects the Treasury Department's funding strategy. Once the floor is reached, the Fed would continue to reinvest principal payments from mortgage-backed securities into Treasury securities to avoid disrupting the housing market, one Fed official said. The official said the Open Market Desk would publish revised guidance in its statement of account on Feb. 4 and would begin announcing the new reinvestment schedule in its weekly release of operations.

Primary dealers have been bracing for a possible end to runoff since the September FOMC meeting, when officials noted that reserve growth had slowed faster than expected. The economist said the $6.5 trillion floor is slightly above the median estimate in a Bloomberg survey of primary dealers published on Dec. 12, which pointed to a floor near $6.4 trillion. The discrepancy suggests the committee wants more cushion before halting normalization.

Timing and What to Watch

The officials said Chair Jerome Powell would not announce the decision at his Dec. 18 press conference because the committee wanted the minutes to convey the technical details. The minutes are scheduled for release at 2 p.m. on Jan. 7. Watch for the precise language the committee uses to describe the reserve floor and whether the statement signals that the next move on interest rates will depend more on inflation data than on labor-market conditions.

If the plan proceeds as drafted, the Fed will stop runoff on Feb. 1 and issue updated operational instructions to primary dealers on Feb. 2. The next FOMC meeting after January is scheduled for March 18-19, and economists expect the committee to hold the federal funds rate steady at 4.25 to 4.50 percent while it assesses the effects of the balance-sheet halt.

The stakes extend beyond interest rates. Halting runoff earlier than many investors expected could signal that the Fed is concerned about strains in funding markets, even after it avoided volatility during the 2024 year-end period. Traders will also watch the Jan. 7 minutes for any discussion of whether the Fed will eventually resume asset purchases to manage the maturity composition of its portfolio.