Fitch Ratings Inc. said on Friday that the Federal Reserve's quantitative tightening will "significantly" weaken liquidity in the US commercial banking system over the course of the next year as the total amount of bank reserves held by the Fed is expected decline.
"QT will also put downward pressure on bank deposits, boosting the system-wide loans-to-deposits ratio," the American credit rating agency cautioned, adding that "tighter liquidity" could exacerbate the "ongoing shift to more restrictive credit conditions," eventually imparing economic growth in the United States.
The Fed's reserves may decrease by $900 billion to $2.5 trillion by year's end, according to a Fitch forecast. "A build-up of US Treasury deposits at the Fed could also drain reserves faster," the agency added.
