Citigroup(C) strategists suggest that Kevin Waller, the nominee for Federal Reserve Chairman, is likely to adopt a gradual approach to reducing the central bank’s balance sheet, which stands at approximately $6.6 trillion, in order to avoid reigniting tensions in the money market. The analysis highlights that any restart of Quantitative Tightening (QT) measures could put pressure on the repurchase market, which currently amounts to about $12.6 trillion.
Citigroup points out that the Federal Reserve paused its balance sheet reduction in December last year precisely because repurchase rates had surged significantly. The repurchase market is a key space for banks to conduct short-term borrowing to meet their daily liquidity needs. Strategists Alejandra Vazquez Plata and Jason Williams wrote in a report that, given the significant volatility in the repurchase market last year, the threshold for restarting QT is “very high,” and policymakers are clearly more inclined to avoid repeating the tensions seen in October 2025, choosing a more moderate approach to balance sheet management.
Waller, a former Federal Reserve governor, has long advocated for a sharp reduction in the Fed’s financial footprint. During the global financial crisis and the COVID-19 pandemic, the Federal Reserve expanded its balance sheet through multiple rounds of asset purchases, causing the balance sheet to balloon to $8.9 trillion in June 2022—an increase from around $800 billion two decades ago. Later in the year, amid rising government borrowing and the liquidity drain caused by the balance sheet reduction, the Federal Reserve paused its reduction and instead began monthly purchases of Treasury bills to replenish system reserves.
However, Citigroup believes that under Waller’s leadership, the Federal Reserve will still have several “de-leveraging” options. The path with the least resistance would be to roll over expiring long-term Treasury bonds into short-term debt, reducing the weighted average maturity of holdings. The strategists also note that Waller may prioritize gaining consensus within the committee for rate cuts, while gradually moving forward with balance sheet management.
Other possible measures include lowering or even halting the current monthly $40 billion Treasury bill purchases, or allowing mortgage-backed securities (MBS) to naturally roll off. Citigroup’s analysis shows that even if the Federal Reserve ends its purchases as early as June, reserves are unlikely to decrease significantly before December 2026. Their base case scenario expects the monthly purchase pace to be reduced to around $20 billion from mid-April and to continue throughout the year.
Additionally, the New York Federal Reserve’s Open Market Operations department expects to maintain higher reserve management purchases in the coming months to offset the significant increase in non-reserve liabilities caused by the April tax season. After that, the overall pace of purchases may slow down considerably. Minutes from the Federal Open Market Committee (FOMC) meeting in December also indicated that participants preferred focusing purchases on Treasury bills, gradually aligning the Federal Reserve’s asset portfolio with outstanding government debt.
Citigroup also noted that the Treasury Department may welcome additional foreign demand for Treasury bills from the Federal Reserve, which would lead to more reliance on short-term debt issuance while delaying the issuance of longer-term coupon bonds. Based on this, Citigroup expects that coupon bond issuance may not begin until November 2026, with a risk of delay until February 2027.
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