Beginning April 1, the Federal Reserve will slow the pace at which it reduces its balance sheet. The Fed will lower the monthly cap on maturing Treasury securities that it lets roll off without replacement from $25 billion to $5 billion, while leaving the cap on mortgage-backed securities at $35 billion. Chair Jerome Powell said the banking system still holds ample cash reserves—about $3.46 trillion—but officials have observed some tightening in money markets. He emphasized that this step is a temporary slowdown and will not alter the Fed’s long-term balance sheet objectives.
The move is closely connected to ongoing debt ceiling negotiations in Congress. After the U.S. reached its statutory debt limit in January, any delay in raising the ceiling tends to send additional cash back into the financial system, which can boost reserves temporarily. That inflow could mask warning signals that the Fed uses to determine when to stop shrinking its balance sheet entirely. Those signals are important to prevent stress similar to the 2019 funding squeeze, which followed an overly rapid balance sheet reduction. Governor Christopher Waller was the lone dissenter in the decision.
Analysts note that maintaining a small $5 billion cap, rather than halting runoff altogether, preserves the Fed’s flexibility. Once the debt ceiling situation is resolved, the central bank would have room to resume quicker reductions if conditions warrant. Since June 2022, the Fed has been gradually shrinking its roughly $6.8 trillion portfolio, and in June 2024 it cut the monthly Treasury runoff cap from $60 billion to $25 billion as part of that process.
This calibrated approach reflects an effort to balance the exit from extraordinary post-crisis and pandemic-era policies with the need to avoid creating liquidity strains in short-term funding markets. By tightening less aggressively for now, the Fed aims to maintain orderly market functioning while keeping its long-run goal of a smaller balance sheet intact. Market participants will be watching monetary policy guidance, reserve levels, and money market conditions for signals about the timing and pace of any future balance sheet adjustments.
In sum, the Fed’s decision to slow Treasury runoff to $5 billion per month is designed to provide a cautious middle path: it reduces the pace of balance sheet normalization without abandoning the policy objective, preserves optionality if liquidity conditions worsen, and prevents temporary shifts in reserves—driven by debt ceiling dynamics—from obscuring important indicators of stress in short-term funding markets.