(Bloomberg) -- The beginning of the Federal Reserve’s tapering of its balance sheet unwind is starting to look further off and more drawn out than some expect, according to Wrightson ICAP.

For the past year and a half, the Fed has been letting as much as $60 billion in Treasuries and as much as $35 billion in agency debt holdings mature each month. But, a debate has been simmering over whether the central bank is misjudging how much it can tighten without causing dislocations in places like the repo market, an essential part of the plumbing of the financial system. 

Read more: How Fed’s Quantitative Tightening Is Going This Time: QuickTake

A handful of central bank policymakers that have weighed in don’t see quantitative tightening, or QT, as an immediate issue. Meanwhile, demand for the overnight reverse repurchase agreement facility — where counterparties like money-market funds can park cash — is dropping faster than the size of the Fed’s balance sheet. That suggests more liquidity is returning to the banking system and lender reserves remain abundant, making such a turn less urgent.

Since QT began, the Fed’s balance sheet has shrunk by about $1.24 trillion to $7.68 trillion, according to the most recent central bank data. During that same period, RRP use has dropped by about $1.38 trillion. 

“At this point, we don’t think this quite rules out the possibility that the Fed might trim its Treasury runoffs from $60 billion to $30 billion per month by the July auction cycle,” Lou Crandall, chief economist at Wrightson, wrote in a research note Monday. “However, it does suggest that the risks in the QT tapering timeline are skewed to a later start date rather than an earlier one.” 

Market participants are expecting to hear more about the Fed’s plans for its balance sheet after its interest-rate decision on Wednesday.

At the December Federal Open Market Committee meeting, some policymakers saw it as appropriate to begin discussing the technical factors that would determine when the US central bank slows the pace of its balance sheet runoff. Dallas Fed President Lorie Logan further sparked speculation over the Fed’s plans in early January when she said officials may need to slow the pace at which they shrink the balance sheet amid signs of scarcer liquidity in financial markets.

Read more: Fed Bosses Who Faced Last Repo Mess Offer Differing Views on QT

Comments from other central bank officials have left Wall Street strategists divided. Bank of America Corp. and Barclays Plc expect the Fed to announce tapering at its March gathering, and conclude by July, however, Wrightson and others like Deutsche Bank see June as the likely starting point for a QT slowdown. 

Usage of the Fed’s reverse repo facility, or RRP, has been considered the canary in the coal mine when it comes to the end of QT because whatever is still parked there — about $581 billion currently — is considered the remaining excess liquidity in the financial system. Even though bank reserve balances are still above the level they were when the central bank began its unwind in June 2022. 

Recent market angst and the central bank’s latest survey suggests that reserve balances at $3.49 trillion may not be as ample as policymakers think, especially given many institutions appear to prefer to hold a buffer of reserves to ensure they have enough liquidity. Time deposits — or certificates of deposit issued in amounts greater than $100,000 — have grown to an all-time high $2.33 trillion in the week through Jan. 17. 

Still, Crandall thinks it’s prudent policymakers are starting the discussion now, though they’re likely to signal that any internal conversations are preliminary and any decision is in the future. 

“The advantage of launching the discussion now is that it would improve the odds that the eventual downshift in balance sheet runoffs will be old news by the time it arrives in the second half of the year,” he said. 

(Adds size of balance sheet and reverse repo facility decline in the fourth paragraph. A previous version was corrected to say tapering of balance sheet unwind in first paragraph.)

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