The path of the Fed's balance sheet reduction is uncertain. CIBC said adjustments may be "slow and limited" and warned of the risk of imbalance in the interbank market.

The Canadian Imperial Bank of Commerce (CIBC) stated that the fixed income markets have overestimated the potential impact of changes in the Federal Reserve's balance sheet policy, which could be slow and limited. CIBC strategist Michael Cloherty and others stated that the Federal Reserve is unlikely to start reducing its $6.7 trillion balance sheet before next year. Even then, in order to avoid market panic, the Federal Reserve will not sell assets such as mortgage-backed securities. They also stated that the Federal Reserve will roll over about one-third of its holdings of US Treasuries. Policymakers have been discussing how to reduce one of the main drivers of balance sheet growth: the banking industry's demand for cash held at the central bank. Dallas Fed President Logan stated last week that she supports reducing the banks' need for reserves by adjusting liquidity rules, following similar calls from Federal Reserve Governor Milan and Vice Chair for Supervision Bowman. CIBC strategists stated that a recent article from the Dallas Fed on how central banks could shrink their balance sheets underestimates the costs and risks of rapidly reducing the balance sheet. They added that there are some "not so obvious" potential issues. First, proposals like lowering bank reserves or implementing tiered rates for bank reserve policies would increase the importance of money market funds in the transmission of monetary policy. These funds have always been a key tool for the Federal Reserve to transmit monetary policy to the market through overnight reverse repurchase agreements. They stated that this would shift some of the control of monetary policy from the Federal Reserve to the Securities and Exchange Commission, which is responsible for regulating mutual funds. This could limit the effectiveness of banking regulators during times of crisis. They wrote: "During times of extreme stress, strong regulatory control over the companies on which you rely to transmit monetary policy could be useful." CIBC believes that the Federal Reserve is unlikely to adjust bank reserve rates or the issuance rates on repurchase agreements, which means that the forward spread between secured overnight funding rates and excess reserve rates is "a bit too large," indicating market mispricing of short-term rates. CIBC also emphasized the timing mismatch: regulatory changes to lower bank reserve requirements would take effect long before the Federal Reserve adjusts the asset side of its balance sheet, leaving policymakers uncertain about the effects of the new policy for a considerable period of time. The Dallas Fed article also suggests that if policymakers reduce reserve rates to decrease demand for reserves, it will incentivize banks to lend more actively, pushing up rates and revitalizing stagnant interbank markets. However, CIBC states that the steep demand curve in the money market reflects the loss of the banking safety net, and without this backstop, mismatches in supply and demand in repurchase transactions could "wildly inflate prices." They wrote: "A shortage of reserves does not bring substantial benefits from creating an active market. Given that sparking a significant increase in rates requires two triggering factors (reserve shortage and supply-demand imbalance), the Federal Reserve is almost impossible to accurately judge when to transition from ample reserves to a shortage." Though some proposals call for a greater use of the Fed's lending tools, including the discount window, to reduce banks' reserve requirements, strategists point out that the stigma attached to such borrowing remains a valid concern for banks' reputations. Broadening the range of eligible counterparties would also increase the central bank's political risk, as it could face accusations of helping a loan institution neglected by private investors.