Wall Street pushes out end of Fed balance sheet wind-down, minutes show

Financial market participants have pushed out yet again the end date for the effort to shrink the size of the Federal Reserve’s large balance sheet, the minutes of the U.S. central bank’s June 17-18 policy meeting showed on Wednesday.

The drawdown of the Fed’s stock of bonds is now expected to stop in February when the balance sheet stands at $6.2 trillion, big banks and money funds told the U.S. central bank ahead of last month’s policy meeting, the minutes noted. That represents a small shift from what survey respondents said ahead of the Fed’s policy meeting in early May, when they eyed a January end date, and $6.125 trillion in total holdings.

The Fed has been shrinking the size of its balance sheet since the summer of 2022 in an effort referred to as quantitative tightening, or QT. The central bank has allowed set amounts of bonds it bought during the COVID-19 pandemic to mature and not be replaced, in an effort that so far has taken the overall stock of cash and bonds it holds from a record $9 trillion to the current level of $6.7 trillion.

The Fed more than doubled its bond holdings to stabilize markets and then provide stimulus to the economy beyond what could be delivered by near-zero short-term rates. The QT program has been aimed at removing excess levels of liquidity from the market as part of a broader monetary policy normalization, but there’s been ongoing uncertainty when that process could end, and at what level of holdings the Fed would be able to rest at.

For some time, market participants have expected the Fed to stop QT this year. But earlier in 2025 the Fed slowed QT in order to reduce the risk of market disruptions while the Treasury Department took action to deal with government financing needs during wrangling over the government’s official borrowing limit and its broader budget needs.

Much of that uncertainty was resolved last week with the passage of a Trump administration budget bill that lifted the borrowing cap, which will allow the Treasury to sell more debt. Increased debt sales will cut into the reserve levels the Fed has been trying to shrink with QT.

The reserves now stand at around $3.3 trillion, a level that’s been steady for some time. The minutes released on Wednesday said market participants told the Fed they see reserves dipping to $2.9 trillion due to QT. Respondents also said the Fed’s reverse repo facility, which held $227 billion on Wednesday, should move to a “low” level.

Wall Street indexes closed higher on Wednesday after Federal Reserve meeting minutes fueled hopes that inflation pressures from President Donald Trump’s tariffs would not derail interest rate cuts this year and the tech-heavy Nasdaq led gains as Nvidia briefly reached a $4 trillion valuation.

The minutes for the mid-June meeting showed that most Fed officials said they expect rate cuts will be appropriate later this year, with price shocks from Trump’s import taxes expected to be “temporary or modest.” However, there was little support for a rate cut at the end of July meeting.

Nvidia finished higher after it became the world’s first company to hit a $4 trillion market value on Wednesday morning, solidifying its position as one of Wall Street’s most favored stocks to tap in the ongoing surge in demand for artificial intelligence technologies.

“Fed officials suggested that they believe inflation will be higher down the road. At the same time, many or most officials suggested that they expect lower interest rates at some point this year. Those two things don’t match,” said Chris Brigati, chief investment officer at SWBC, an investment company in San Antonio, Texas. “Perhaps they’re starting to put a little bit more weight into what’s going on with the labor market.”

Besides Nvidia, other market boosts came from megacap companies including Microsoft Corp and Amazon.com.

“There’s definitely a megacaps bias. ... To some extent it’s a flight to safety but not what you would traditionally think of as a safety trade,” said Kevin Gordon, senior investment strategist at Charles Schwab. “From a trade standpoint it’s not like you’re getting much clarity.”

According to preliminary data, the S&P 500 gained 36.36 points, or 0.58%, to end at 6,261.88 points, while the Nasdaq Composite gained 189.34 points, or 0.93%, to 20,607.23. The Dow Jones Industrial Average rose 214.23 points, or 0.48%, to 44,450.53.

While Wall Street indexes had fallen on trade jitters on Monday, they have steadied since then, with analysts noting that investors have become used to Trump’s pattern of saber-rattling on tariffs. And with the deadline for the latest tariffs pushed to August 1, many are betting that negotiations will defuse the trade war.

Trump on Wednesday issued letters to seven countries, calling for tariffs of 30% on Algeria, Iraq, Libya and Sri Lanka, 25% on Brunei and Moldova, and 20% on the Philippines. The European Union has said it could reach an outline trade agreement with the U.S. in the coming days.

On Tuesday, Trump had ramped up his trade offensive with the announcement of a 50% tariff on copper and a vow to slap long-threatened levies on semiconductors and pharmaceuticals. On Monday, Trump hit 14 trading partners with a fresh wave of tariff warnings, including Japan and South Korea.