Some analysts see Fed halting balance sheet drawdown on rate turbulence

SOME Wall Street analysts now believe the US Federal Reserve will pull the plug on its long-running effort to shrink its balance sheet at the end of the month.

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These central bank watchers believe the ground has shifted for quantitative tightening, or QT, due to mounting money market friction, which could threaten the Fed's control over the interest rate target it uses to achieve its inflation and employment goals.

Stopping the withdrawal of liquidity by QT at the Oct. 28-29 Federal Open Market Committee (FOMC) meeting would help ensure the technical aspects of monetary policy continue to run well, these analysts reckon.

"We expect the FOMC to end its securities runoffs at this month's meeting," analysts at Wrightson ICAP said in a note over the weekend. While they're skeptical genuine liquidity tightness has emerged in money markets, some of the recent turbulence in short-term lending "is clearly a sufficient warning sign to justify moving on to the next phase of the Fed's normalization plan."

Evercore ISI forecasters wrote on Monday "we think the Fed will now signal the end of QT at its October meeting with a view to wrapping up before year-end pressures, although the actual end may come a month or two after the announcement."