Two prominent economists published a warning on June 2 advising the Fed's new chairman against significantly shrinking the central bank's balance sheet, arguing such a move risks destabilizing short-term funding markets. The caution comes as the new chair has publicly endorsed further balance sheet normalization, creating a notable policy tension heading into upcoming FOMC deliberations.
For the traditional repo desk, accelerated QT reduces the reserve buffer that keeps overnight repo rates stable. Prior episodes of reserve scarcity in 2019 caused SOFR spikes that stressed repo counterparties including primary dealers and MMFs. Armada should track primary dealer positioning data and Fed RRP usage as leading indicators of reserve tightness, and ensure GMRA agreements include adequate rate adjustment provisions.