The minutes of the January 2025 FOMC meeting released last night revealed positive information, and the following is a summary of the main content: Interest rate policy remains cautious: Federal Reserve officials generally indicate that they tend to maintain the current level of restrictive interest rates unchanged in the absence of sustained inflationary pressures and a strong economy. Many committee members emphasized the need to see more progress in combating inflation before adjusting interest rates. Inflation risk concern: Meeting minutes show that officials are concerned about the upward risk of inflation, believing that uncertainty in future policies such as tariffs or other economic policies may push up price pressures. Although inflation has eased from its peak in 2022, it is still above the target level. Economic and Labor Market Assessment: Members believe that the US economy is performing steadily and the labor market remains strong, providing ample room for the Federal Reserve to respond calmly in its interest rate decisions. Some officials pointed out that concerns about a cooling labor market have weakened. Future policy path: Most attendees believe that the risks are roughly balanced, and the pace of future interest rate cuts may be slower or paused to observe economic data and inflation trends. The meeting also mentioned that if the economy continues to be strong, policies can maintain a restrictive stance. • Other discussions: Some officials mentioned that there may be fluctuations in reserve size and that it may be necessary to adjust the pace of balance sheet reduction until certain uncertainties, such as the debt ceiling issue, are resolved. Overall, the statement leans more towards hawks, reflecting the Federal Reserve's priority focus on inflation control and cautious attitude towards loose policies. But at the FOMC press conference, Powell's overall speech was also hawkish, and this year's expectations were largely consistent. The information revealed about the suspension of balance sheet reduction actually brought new positive expectations to risk assets. --------------------------------------------------------- Adjustment of scaling speed analysis: 1. Background and current situation The Federal Reserve will begin to shrink its balance sheet from 2022, aiming to reduce the size of its balance sheet accumulated through large-scale bond purchases during the pandemic (from a peak of about $9 trillion to about $7 trillion at the beginning of 2025). At present, the monthly reduction rate is $25 billion US treasury bond bonds and $35 billion institutional mortgage-backed securities (MBS). However, meeting minutes indicate that officials have begun discussing whether this pace needs to be adjusted, especially in the context of uncertainty over the possibility of facing a federal debt ceiling issue by 2025. 2. Reasons for adjusting the shrinking speed The uncertainty of the debt ceiling: It was mentioned in the meeting that the debt ceiling may be restored in early 2025, which will lead to fluctuations in the balance of the Ministry of Finance's General Account (TGA). If the TGA balance decreases, bank reserves and overnight reverse repurchase agreement (ON RRP) balances will increase; On the contrary, if TGA is reconstructed, it will reduce liquidity. These fluctuations may interfere with the Federal Reserve's assessment of the state of the money market, thereby affecting the stability of the balance sheet tightening process. Some officials suggest suspending or slowing down the balance sheet reduction until the debt ceiling issue is resolved to avoid a rapid decline in reserve balances below an appropriate level. • Liquidity management needs: As ON RRP balances continue to decline (partially replaced by an increase in Treasury bond issuances), market liquidity conditions may change. Officials are concerned whether the speed of balance sheet reduction will lead to a rapid decline in reserve levels, affecting the normal volatility of the money market and effective control of the federal funds rate. Economic and inflation balance: The minutes show that the Federal Reserve hopes to further lower inflation while maintaining a strong economy and a stable labor market. If the balance sheet is reduced too quickly and liquidity is tightened, it may exacerbate downward pressure on the economy, which is inconsistent with the current cautious monetary policy tone. 3. Possible adjustment directions • Slowing down the rate of scale reduction: Some officials tend to reduce the monthly scale of scale reduction in the next few months, such as reducing treasury bond from $25 billion to a lower level, while maintaining the pace of MBS reduction. This adjustment aims to smooth the market transition and avoid liquidity shocks. Suspend balance sheet reduction: If the debt ceiling issue causes severe market volatility, suspending balance sheet reduction is considered an option. Suspending can provide the Federal Reserve with more time to observe economic data and policy effects, especially when inflation remains above the 2% target. • Timetable for ending the balance sheet reduction: According to market research (such as the report from the New York Fed), the reduction may end in mid to late 2025, and the balance sheet size is expected to stabilize between $6 trillion and $6.5 trillion. The adjustment speed may delay this timetable, especially if the Federal Reserve prioritizes liquidity stability. 4. Impact on the market and policies Monetary policy signal: Slowing down or suspending balance sheet tightening may be interpreted by the market as a signal of policy easing, although the minutes emphasize that this is more of a technical adjustment rather than a shift towards dovish sentiment. This may alleviate the upward pressure on bond yields and support the stock market and risk assets. Interest rate path correlation: The adjustment of balance sheet contraction speed is closely related to the pace of interest rate cuts. If the balance sheet reduction slows down, the Federal Reserve may have more room to implement limited interest rate cuts in 2025 (market expectations are 1-2, each by 25 basis points) to balance economic support and inflation control. Liquidity and Banking System: Slowing down balance sheet contraction can help maintain bank reserves at an "adequate" level, avoiding a repeat of the tight repo market in 2019, especially when debt ceiling issues may trigger a surge in short-term funding demand. 6. Conclusion The discussion on adjusting the pace of balance sheet contraction reflects the Federal Reserve's multiple considerations between inflation, economic growth, and financial stability. Under the current hawkish tone, slowing down the balance sheet reduction is more likely to be gradual rather than a complete pause, aimed at reserving a buffer for uncertainty such as the debt ceiling, while maintaining a restrictive stance on monetary policy. The final decision will depend on the data performance in the coming months, especially inflation trends and money market conditions. If inflation continues to be higher than expected, the balance sheet adjustment may be postponed; If the economy slows down significantly, the probability of slowing down or even pausing will increase.