Fed to Halt Balance Sheet Runoff in January and Hold Rates, Officials Signal

Fed Prepares to Halt Balance-Sheet Runoff

The Federal Reserve is preparing to halt the runoff of its Treasury and mortgage-backed securities holdings at the Jan. 27-28 policy meeting while holding the federal funds rate steady, according to two Fed officials familiar with the internal discussion. The move, which would end the quantitative tightening program that began in 2022, would leave the central bank's balance sheet at roughly $6.1 trillion, the officials said. The move would mirror the Fed's 2019 decision to halt runoff after repo markets seized, though officials said the current conditions are less acute. Both Fed officials said the balance sheet would remain above the $4 trillion level seen before the pandemic.

The decision has not been finalized, and policymakers are expected to wait for the December jobs report on Jan. 9 and the December consumer price index report on Jan. 15 before committing, the officials said. But both officials said Chair Jerome Powell has signaled to colleagues that the Fed has reached the point where continuing to shrink the balance sheet risks creating unnecessary stress in overnight funding markets. The Fed's balance sheet stood at roughly $6.8 trillion at the start of 2025 and has declined by about $700 billion over the past 12 months.

The Fed currently allows up to $25 billion in Treasury securities and $35 billion in mortgage-backed securities to roll off its balance sheet each month without reinvestment. Halting the runoff entirely in January would mean the Fed would begin reinvesting all principal payments, a shift that could add roughly $60 billion in monthly demand to the Treasury market, according to an economist at a Wall Street firm who was briefed on the likely policy path. The economist said the change would be announced in the policy statement released at 2 p.m. Eastern on Jan. 28.

Market Signals and Dealer Discussions

A trader at a primary dealer said the New York Fed's markets desk began sounding out dealers on Dec. 30 about their expectations for the January meeting, a sign that the Open Market Operations desk is updating its models for a possible pause in runoff. The trader, who works at one of the 24 primary dealers authorized to trade directly with the Fed, said the desk asked specifically about demand for overnight reverse repurchase agreements at rates between 4.25 and 4.50 percent.

Money markets have shown signs of strain in recent weeks. The Secured Overnight Financing Rate, or SOFR, has traded closer to the top of the Fed's target range, and the spread between SOFR and the interest on reserve balance rate has narrowed. Two Fed officials said the staff at the Board of Governors has raised concerns that a continued runoff could force the Fed to intervene in repo markets more frequently. One official said the staff presentation to the Federal Open Market Committee on Dec. 17 included a slide showing that reserve balances had fallen to a level historically associated with increased volatility in the overnight rate.

The primary dealer trader said dealers expect the Fed to announce that it will taper the monthly runoff caps in January and eliminate them entirely by March if market conditions remain stable. But the trader said the more aggressive scenario, a full halt in January, gained traction after the Dec. 16-17 meeting, when several regional bank presidents expressed concern about year-end liquidity pressures spilling into the first quarter. The trader said futures markets were pricing in a 62 percent chance of a full January halt as of the close on Dec. 30.

Treasury Coordination and Political Context

An economist at a Wall Street firm said Treasury Secretary Scott Bessent has been consulted on the timing because any decision to stop balance-sheet runoff would affect the Treasury Department's debt issuance schedule for the first quarter. The Treasury Borrowing Advisory Committee is scheduled to meet on Jan. 28, and the department plans to release its quarterly refunding announcement on Jan. 29, the economist said. The economist projected that a halt would lower 10-year Treasury yields by 15 to 20 basis points and could push the dollar index lower by 1 to 2 percent against major currencies.

The Fed officials said the policy statement for the Jan. 27-28 meeting would likely describe the balance sheet as no longer actively declining and would announce that principal payments would be reinvested in Treasury securities. The officials said the Fed would continue to allow mortgage-backed securities to roll off in a measured way to avoid disrupting the housing market, but the overall balance sheet would stabilize rather than shrink. The runoff has proceeded alongside rate cuts totaling 100 basis points in 2025, leaving the federal funds rate in a range of 4.25 to 4.50 percent after the Dec. 16-17 meeting.

The decision carries political significance because the White House has been pressing the Fed to support lower mortgage rates ahead of the 2026 midterm campaign. The Fed officials emphasized that the central bank would frame the halt as a technical adjustment to liquidity management rather than a response to political pressure. What to watch in the next 48 to 72 hours: the release of the Fed's discount window borrowings report on Jan. 2, any statement from the New York Fed's markets desk, and trading in fed funds futures for the March 17-18 meeting. If the balance-sheet halt is confirmed, the January refunding announcement from Treasury on Jan. 29 will also be scrutinized for signs that the department is reducing bill issuance to avoid a supply clash with the Fed.