Fed to Slow Balance Sheet Runoff to $25 Billion Monthly Starting January

The Decision Inside the FOMC

The Federal Reserve will reduce the monthly pace of balance sheet runoff to $25 billion beginning in January, according to two Fed officials familiar with the internal discussion. The change, which was finalized during the Federal Open Market Committee meeting on Dec. 16 and 17, represents a sharper slowdown than most primary dealers and Wall Street economists had anticipated. The officials, who spoke on condition of anonymity because the decision has not been announced, said the reduction from the current $60 billion monthly cap was driven by concerns that liquidity conditions in the Treasury market were tightening faster than policymakers expected.

The runoff cap, which sets the maximum amount of maturing Treasury and agency mortgage-backed securities the Fed allows to roll off its balance sheet without reinvestment, has been set at $60 billion since May 2024. Under the new plan, the Treasury component will fall to $15 billion per month and the agency MBS component to $10 billion per month, the officials said. The Fed's balance sheet stood at roughly $6.85 trillion as of Dec. 10, down from a peak of $8.96 trillion in April 2022.

A trader at a primary dealer said the firm's repo desk had noticed signs of reserve scarcity in recent weeks, with the Secured Overnight Financing Rate trading persistently above the interest on reserve balance rate. The trader said the decision to slow runoff was likely discussed in the FOMC's closed session on Dec. 16, when staff presented updated estimates of the so-called ample reserves threshold. One Fed official said Chair Jerome Powell planned to mention the adjustment during his post-meeting news conference on Dec. 17 but held off at the request of colleagues who wanted to finalize operational details with the New York Fed's Open Market Trading Desk.

Market Impact and Primary Dealer Reaction

The adjustment is expected to be announced through a brief statement from the Federal Reserve Bank of New York on the morning of Dec. 19, followed by a speech by Powell at the Economic Club of Washington on Dec. 20. An economist at a Wall Street firm said the move would effectively add roughly $35 billion of incremental demand to the Treasury market each month, a significant shift at a time when the Treasury Department is increasing issuance to fund a widening federal deficit. The economist, whose firm advises several primary dealers, estimated that the slowdown could lower 10-year Treasury yields by 8 to 12 basis points in the first quarter of 2026.

The decision comes as the Treasury's quarterly refunding announcement, scheduled for Jan. 29, is expected to detail larger auction sizes for 2-year, 3-year, and 5-year notes. A senior Treasury official, who was not authorized to discuss Fed deliberations, said the department had been briefed informally on the expected slowdown but had no role in the decision. The official said Treasury Secretary Scott Bessent viewed the move as consistent with his public statements about the importance of orderly market functioning.

Primary dealers had been split on the timing of a runoff slowdown. In a survey conducted by the New York Fed in late November, 11 of 24 primary dealers predicted the cap would be reduced in the first half of 2026, while 7 expected no change before July. Only 4 dealers predicted a January reduction. The trader at a primary dealer said the firm had repositioned its Treasury desk on Dec. 17 after picking up signals from the FOMC statement's revised language on balance sheet policy, which removed a long-standing reference to gradual reductions.

What Comes Next

The Fed officials said the central bank planned to review the new cap at the March 17 and 18 FOMC meeting and could adjust it further depending on money market conditions. They emphasized that the slowdown was a technical adjustment to reserve management, not a shift in the broader stance of monetary policy. The Fed is widely expected to hold its benchmark federal funds rate steady at 4.50 to 4.75 percent at the January meeting, with futures markets pricing in roughly even odds of a rate cut in March.

The change will be implemented through an update to the Fed's Policy Normalization Principles and Plans statement, which was last revised in May 2024. The New York Fed is expected to publish updated redemption caps for January on its website at 9:00 a.m. ET on Dec. 19. The Fed's holdings of Treasury securities totaled $4.35 trillion as of Dec. 10, while its agency MBS holdings stood at $2.08 trillion.

Investors will watch the Fed's reverse repurchase agreement facility, which has seen balances decline to $285 billion from more than $2.3 trillion in late 2022. One Fed official said staff viewed the falling reverse repo balance as a key indicator that reserves were moving from abundant toward ample, the zone where policymakers prefer to operate. The official said the slowdown was designed to extend the runway before the Fed needs to consider ending runoff entirely, a step that could come as early as mid-2026 if the Treasury's borrowing needs continue to rise.