Bank of Montreal: Under Waller's Leadership, the Federal Reserve Could Follow the Bank of England's Approach to Smooth Balance Sheet Reduction

　　Bank of Montreal strategists say that the Federal Reserve can learn from the Bank of England's approach to reducing its balance sheet without unsettling the markets.

　　Laurence Mutkin, Head of EMEA Rates Strategy at the bank, noted that the Bank of England successfully reduced the size of its bond portfolio by nearly half over four years without causing significant market disruption.

　　He stated that this included providing ample liquidity support: the Bank of England introduced short-term liquidity instruments—the Short-Term Repo (STR) and the Indexed Long-Term Repo (ILTR).

　　Note: The STR is a weekly mechanism that allows banks and building societies to borrow central bank reserves for one week, using high-quality collateral such as UK government bonds.

　　Note: The ILTR is a weekly auction operation that allows financial institutions to borrow central bank reserves for a term of six months, using eligible collateral.

　　Mutkin said that clear communication regarding the applicability of liquidity instruments (including market consultation) helps reduce risks during the balance sheet reduction process.

　　He stated: “There are aspects of the Bank of England’s approach worth emulating, which could provide comparable guidance for the Federal Reserve under Waller’s leadership in advancing balance sheet reduction.”

　　Kevin Warsh, nominated as Federal Reserve Chairman by U.S. President Donald Trump, has publicly expressed his desire to reduce the balance sheet.

　　The Federal Reserve paused its balance sheet reduction process in both 2019 and 2025.

Editor: Chen Yujia