JPMorgan Chase provides a timeline for the Federal Reserve's QT reduction: Discussion in January, Announcement in March, Implementation in April.

With half a month to go until the Federal Reserve's interest rate meeting on January 31st, Wall Street investment banks have already begun positioning themselves for the Fed's slowdown in "balance sheet normalization". JPMorgan Chase bluntly stated that in order to avoid a "liquidity" crisis, the Fed will begin discussing the slowdown of quantitative tightening (QT) in January, announce it in March, and officially start the balance sheet reduction in April, with the process ending in November.

Dallas Fed President Lorie Logan stated that due to signs of liquidity shortage in the financial markets, the Fed may need to slow down the pace of balance sheet reduction. Since then, speculation on the Fed's cessation of QT has been increasing on Wall Street.

In a report on Friday, JPMorgan Chase strategist Jay Barry wrote that the contraction of liquidity in the financial system will be an important reason for the Fed to consider stopping the balance sheet reduction ahead of schedule. The Fed will propose a timetable outline at the meeting in late January, convey it through the minutes of the meeting to be released in mid-February, and officially start the balance sheet reduction in April.

JPMorgan Chase believes that after the start of the balance sheet reduction, the Fed's monthly reduction limit for U.S. Treasury bonds will decrease from $60 billion to $30 billion, and it is expected that the monthly reduction limit of $35 billion for mortgage-backed securities (MBS) will remain unchanged. QT will end at the end of November:

We believe that the Fed may set the ratio of reserve supply to GDP at around 10%. Quantitative tightening will end at the end of November, at which time the trading volume of the Fed's overnight reverse repurchase agreement (ON RRP) will still be sufficient to maintain the stability of the money market.

On January 15th, Wall Street Journal reporter Nick Timiraos, known as the "New Fed News Agency", wrote that due to the rapid decline in the scale of U.S. bank reserves and the faster-than-expected decline in overnight reverse repurchase agreement balances, the Fed is considering slowing down the balance sheet reduction to avoid "a seemingly insignificant but crucial corner of the financial market being disrupted".

Timiraos stated:

Fed officials will begin discussing (but not ending) the so-called quantitative tightening policy at this month's policy meeting at the earliest, which could have a significant impact on the financial markets.

According to Timiraos, there are three reasons why the Fed is considering slowing down the balance sheet reduction:

First, the Fed is currently reducing the size of its Treasury holdings at a pace of $60 billion per month, which is twice the amount from five years ago. Continuing to reduce the balance sheet at this pace increases the risk of depleting reserves quickly, leading to a surge in money market interest rates.

Second, there are signs that the cash surplus in the money market is rapidly decreasing, as reflected in the "faster-than-expected decline" in the Fed's overnight reverse repurchase agreement balances. Since late August, it has decreased by about $1 trillion to around $680 billion. Third, compared to five years ago, the US banking system currently requires more reserves. A study co-authored by John Williams, President of the Federal Reserve Bank of New York, in 2022 found that banks' demand for reserves has been increasing over the past decade. The report states that once reserves fall below 13% of total bank assets, money market rates begin to rise.

As for when the Federal Reserve will slow down its quantitative tightening (QT), Wall Street investment banks have different opinions. Bank of America and Barclays predict that the Federal Reserve may start to slow down in April and end QT before midsummer. Deutsche Bank and UBS expect the Federal Reserve to begin slowing down QT in the second quarter of this year. Morgan Stanley and Goldman Sachs, on the other hand, are more cautious, stating that the Federal Reserve wants to give the market sufficient time to prepare and may not take action until September.