Citi: The Federal Reserve is not afraid of a short-term surge in funding rates, and the balance sheet will continue until next year

The Federal Reserve is likely to continue its plan to shrink its balance sheet until the second quarter of 2025, barring a recession, Citi said, a longer period than previously forecast. The Fed has been gradually reducing its bond holdings since June 2022 through a process known as quantitative tightening (QT). The Fed said last week it would slow the pace of the monthly sell-off of Treasuries, a move partly aimed at easing potential stress in funding markets. Citi had expected the Fed's measures to shrink its balance sheet to continue until the end of 2024, largely in line with expectations from other Wall Street strategists.