Jake Schurmeier of Harbor Capital Management discusses the Federal Reserve’s Bank Term Financing Program that was put in place after the failures of Silicon Valley Bank and Signature Bank of New York.

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As the Federal Reserve faces increased pressure to slow down its process for reducing its balance sheet amid recent bank failures, former New York Fed executive Brian Schurmeier believes the chances of this happening are “pretty high.”

The Federal Reserve has been gradually reducing the size of its balance sheet through a process known as quantitative tightening (QT). This involves unwinding the massive stimulus measures put in place following the 2008 financial crisis, which involved purchasing large amounts of Treasury bonds and mortgage-backed securities.

However, recent bank failures have reignited concerns about the impact of QT on the financial system. In September, the collapse of Evergrande, a major Chinese property developer, sparked fears of a ripple effect across global markets. Additionally, the failure of two small banks in the U.S. in December raised questions about the potential risks posed by the Fed’s balance sheet reduction.

Brian Schurmeier, who served as the New York Fed’s financial institution supervision and credit executive, believes these events have increased the likelihood of the Fed dialing back on QT. In an interview with CNBC, he stated, “I think the probability of pulling back and stopping QT, or reducing it, is pretty high right now.”

Schurmeier’s comments reflect growing concerns among policymakers and market participants about the potential impact of QT on market liquidity and the stability of the financial system. Critics argue that the Fed’s balance sheet reduction could exacerbate market volatility and stress in the banking sector, especially in the event of unexpected shocks or disruptions.

Amid these concerns, some have called for the Fed to rethink its approach to QT and consider slowing down the pace of balance sheet reduction. Others have suggested pausing or halting QT altogether until the economic and financial environment becomes more stable.

The Fed has already indicated its willingness to be flexible with its balance sheet reduction plans. In November, Fed Chair Jerome Powell signaled that the central bank was open to adjusting the pace of QT if necessary, stating that it would be “guided by incoming data and the evolving assessment of the economic outlook.”

As the Fed navigates the complex task of managing its balance sheet while contending with potential risks to the financial system, the debate over the future of QT is likely to intensify. With concerns about bank failures and market stability on the rise, the Fed may face increasing pressure to reconsider its approach to balance sheet reduction and prioritize the stability of the financial system. Ultimately, the decision to rein in QT may depend on how the Fed assesses the potential risks and challenges posed by the current economic and financial landscape.