I would advise the Fed against pausing QT, but perhaps the central bank will pause QT this summer as part of raising the debt ceiling.

By “pause” I mean the following: Congress will lift the debt limit this summer (it is not a question of “if” but “when”). Once the debt limit is lifted, Treasury will issue new Treasury securities (some combination of Bills, Notes and Bonds). There will not be sufficient demand from market participants or foreign governments to absorb the new Treasury securities that will flood the market.

Therefore, the Fed will have to step in and create artificial demand for the new Treasuries. If the Fed at that time does not want to dilute the impact of its QT effort, it will have to sell Treasuries that will be equal to or exceed the value of the new Treasuries it will add to its balance sheet. If the Fed’s purchases of new Treasuries exceed sales and maturities, the Fed technically will be “easing” at that juncture.

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