Bank of America and JPMorgan Chase predict: The Federal Reserve will stop balance sheet reduction this month.

```

Strategists at JPMorgan Chase and Bank of America now expect that the Federal Reserve will stop reducing its approximately $6.6 trillion balance sheet this month, ending the process aimed at withdrawing liquidity from financial markets.

Both Wall Street giants have moved forward their forecasts for the end of the Fed’s “quantitative tightening” (QT), citing the recent rise in borrowing costs in the U.S. dollar funding markets. Previously, they expected the Fed’s gradual selling of U.S. Treasuries and mortgage-backed securities (MBS)—a balance sheet reduction operation that started in June 2022—to end in December this year or early next year.

Fed officials are expected to discuss the future of the balance sheet at next week’s FOMC meeting in Washington. The market generally believes that the Fed’s policy interest rate is likely to be lowered to 3.75%–4%, but there are still disagreements on Wall Street about when policymakers will officially end quantitative tightening.

Some institutions, including TD Securities and Wrightson ICAP, have moved their expectations forward to October, while Barclays and Goldman Sachs expect the process to end at a later date.

Earlier this month, Fed Chair Jerome Powell stated in a speech that the balance sheet reduction would stop when bank system reserves are slightly above what policymakers deem “ample”—the minimum required to prevent market turmoil. Powell also gave his strongest signal yet that the Fed may be close to reaching that point in the coming months.

Bank of America strategists Mark Cabana and Katie Craig wrote in a report Thursday: “Current or higher levels of money market rates should send a signal to the Fed that reserves are no longer ample.” They pointed out that the rise in repo rates and intensifying funding pressures indicate the financial system is approaching a state of reserve scarcity.

The team of strategists led by Teresa Ho at JPMorgan stated that this week’s funding environment prompted them to move their expectations to an earlier date. In a report issued Wednesday night, they wrote that as the Fed’s Reverse Repo Program (RRP) balances continue to decline, more friction is emerging in market operations. Given the tightening funding conditions this week, the Fed may end quantitative tightening at next week’s October FOMC meeting.

JPMorgan currently expects, in addition to ending balance sheet reduction at the October meeting, the Fed will immediately launch temporary open market operations, especially aimed at easing funding pressures during settlement days, the end of the Canadian fiscal year, and other periods.

JPMorgan predicts that the Fed will begin Treasury bill reserve management purchases in early Q1 2026. The reserves-to-nominal GDP ratio remains above the level of September 2019, and funding market tensions have not yet reached the levels seen at that time.

JPMorgan listed evidence of growing funding strain: Typically, this period would see repo rates pressured downward as government-sponsored enterprises (GSEs) put cash into the repo markets, but the opposite is now happening.

Another reason supporting an end to Fed quantitative tightening is that the repo market turmoil in September 2019 revealed the Fed’s significantly lower tolerance for volatility in the federal funds rate and the “money market fund system.” “A repeat could have severe consequences, especially considering the past decade’s frequent criticisms of the Fed’s overreaching interventions. It should focus on its core mandate—to set monetary policy to achieve full employment and price stability.”

Risk Warning and DisclaimerThe market carries risks, and investments must be made with caution. This article does not constitute personal investment advice, nor does it take into account the particular investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable to their specific circumstances. Investments made based on this article are at your own risk. ```