Why Fed’s Waller Wanted to Maintain the Pace of Balance Sheet Runoff
Article published on March 24th, 2025 3:00AM UK Time
At the latest Federal Reserve meeting, policymakers decided to slow the pace of balance sheet reduction, adjusting the monthly Treasury runoff cap from $25bn to $5bn while keeping the MBS cap at $35bn. However, Fed Governor Christopher Waller dissented, preferring to continue the current pace of balance sheet decline, arguing that the financial system is not yet close to reserve scarcity and that a full plan for managing liquidity is still needed. On Friday last week he communicated why.
Why Waller Opposed Slowing the Runoff
1️⃣ Ample Reserves in the System
- Waller believes that reserve balances remain abundant, currently standing at over $3 trillion.
- He sees no immediate risk of liquidity shortages that would require a slowdown in balance sheet runoff.
2️⃣ No Signs of Reserve Scarcity
- According to Waller, money market indicators and discussions with banking institutions suggest that the banking system still has ample reserves.
- This indicates that liquidity is not yet constrained, meaning there is no urgent need to slow the balance sheet runoff.
3️⃣ Confidence in the June 2024 Slowdown Plan
- Waller supports the previously planned slowdown in balance sheet reduction beginning in June 2024.
- He believes this adjustment is already sufficient to prevent unintended market disruptions and that additional slowing is unnecessary at this stage.
4️⃣ Fed Tools Are Available for Liquidity Management
- Waller emphasized that the Fed has tools to mitigate short-term liquidity disruptions, reducing the need for preemptive action.
- If markets face unexpected stress, the Fed can respond dynamically rather than slowing runoff prematurely.
5️⃣ A Clear Plan is Still Needed
- Despite agreeing with the overall balance sheet normalization strategy, Waller believes the Fed still lacks a concrete plan for eventually pausing or stopping the runoff.
- He advocates for continued discussions on a structured exit strategy rather than immediate action.
Market Implications of Waller’s Stance
📊 If Waller’s approach was followed (continued balance sheet runoff):
- Higher Treasury yields, as liquidity drains from the system.
- Potential USD strength, as tighter monetary conditions support the currency.
- Pressure on risk assets, as reduced liquidity makes financing conditions less favorable.
📉 With the Fed opting to slow the runoff:
- More liquidity remains in the system, supporting equities and bonds.
- Lower Treasury yields, easing financial conditions.
- Possible USD weakness, as the Fed moves closer to a more accommodative stance.
Powell’s Comments on Rate Cuts & Inflation Outlook
- Powell reiterated that inflation may be transitory, but the impact of tariffs could delay further disinflation progress this year.
- Despite weaker consumer spending and rising uncertainty, Powell emphasized that rate cuts are not imminent and policy remains restrictive.
- The costs of waiting to cut rates are seen as low, as the Fed weighs weaker growth against persistent inflation risks.
Bottom Line
While Waller remains cautious about preemptively slowing the balance sheet runoff, the broader Fed committee opted for a more measured approach, prioritizing financial stability amid ongoing economic uncertainty. The decision signals greater flexibility from the Fed, but Waller’s dissent highlights the ongoing debate within the Fed