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Fed Weighs Pausing Balance-Sheet Runoff as Debt Ceiling Risks Loom

by Team Lumida
March 19, 2025
in Macro
Reading Time: 4 mins read
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Market Watch: Fed Holds Rates, Hints at September Cut”

"Federal Reserve Bank of New York Building" by epicharmus is licensed under CC BY 2.0

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Key Takeaways:

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  • The Federal Reserve is considering pausing or slowing its $6.8 trillion balance-sheet runoff to avoid market disruptions tied to the federal debt ceiling.
  • The runoff process, which reduces reserves in the banking system, could collide with Treasury cash management as Congress debates raising the debt limit.
  • A pause would be a tactical move to prevent excessive reserve drainage, with the Fed likely resuming the runoff after the debt ceiling is resolved.
  • If economic conditions worsen, the Fed could halt the runoff entirely, shifting its focus to supporting growth.

What Happened?

The Federal Reserve is deliberating whether to pause or slow its balance-sheet runoff, a process that reduces its holdings of Treasurys and mortgage-backed securities. This runoff, which drains reserves from the banking system, has been ongoing since 2020 as part of the Fed’s policy tightening. However, the looming federal debt ceiling complicates this process. As the Treasury Department manages its cash to avoid breaching the debt limit, reserve levels in the banking system could fluctuate unpredictably. To avoid a repeat of the 2019 funding market turmoil, Fed officials are considering a temporary pause to ensure stability.

Why It Matters?

The interplay between the Fed’s balance-sheet runoff and the federal debt ceiling poses risks to financial markets. If reserves are drained too quickly, it could disrupt overnight lending markets, creating broader instability. A pause in the runoff would allow the Fed to maintain control over reserve levels while Congress and the Treasury address the debt ceiling. For investors, this signals the Fed’s cautious approach to managing liquidity and avoiding unintended market stress. However, if economic conditions deteriorate, the Fed may halt the runoff entirely, signaling a shift away from tightening policies.

What’s Next?

The Fed is expected to monitor the debt ceiling negotiations closely, with a potential pause in the runoff lasting until several months after the debt limit is raised. Once the Treasury rebuilds its cash balance, the Fed could resume shrinking its holdings. Investors should watch for signals from the Fed’s upcoming statements, as well as developments in Congress regarding the debt ceiling. Additionally, any signs of economic weakness could prompt the Fed to reconsider its tightening strategy altogether, potentially impacting bond markets and broader financial conditions.

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© 2025 Lumida Wealth Management LLC is an SEC registered investment adviser. Privacy Policy. Cookies Policy.
Disclaimer Important Information This site is for informational purposes only. Information presented on this site does not constitute as investment advice.

Lumida Wealth Management LLC (‘Lumida”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

Lumida's website (referred to herein as the "Website") is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Website on the Internet should not be construed by any client and/or prospective client Lumida’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.

Any subsequent, direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

‍Lead Capture Forms: By submitting your contact information in the forms on this site, you are not obligated to invest in Lumida's product or services.
‍Address: Lumida Wealth Management, 25 W 39th Street Suite 700, New York, NY 10018