On March 19, Nick Timiraos, a Wall Street Journal reporter known as the "Fed whisperer," reported in his latest article that Federal Reserve officials will consider adjusting the policy of reducing their $6.8 trillion asset holdings at their meeting on Wednesday. Over the past three years, the Federal Reserve has been reducing its portfolio of US Treasuries and mortgage-backed securities accumulated during previous stimulus programs, including the measures taken in 2020 to stabilize dysfunctional markets disrupted by the COVID-19 pandemic.

The Federal Reserve is trying to avoid a repeat of the situation in 2019, when it was also reducing its balance sheet. At that time, the balance sheet reduction led to stress in the overnight funding market, forcing the Federal Reserve to change its policy and expand its balance sheet. Due to the interaction between the Federal Reserve's balance sheet reduction and the need for Congress and the White House to raise the federal debt ceiling, the possibility of market volatility in the coming months will increase.

At the most recent meeting in January, Federal Reserve officials discussed the risks posed by the need to raise the debt ceiling, which could lead to a rapid depletion of reserves from the system. The meeting minutes show that officials discussed slowing or pausing the reduction of the balance sheet for a few months so that the debt ceiling would not affect the Federal Reserve's ability to fine-tune its balance sheet.

Blake Gwinn, an interest rate strategist at RBC Capital Markets, said that Federal Reserve officials could pause the reduction of reserves until a few months after the debt ceiling is raised, allowing the Treasury to rebuild its cash balance. At that point, the Federal Reserve could resume the reduction of reserves on its own terms.