The Fed could soon start to shrink its massive balance sheet, unless Congress manages to spook financial markets with a rip-roaring battle over the budget and debt ceiling.
"[The Fed] just signaled that September is quite likely [when] they move forward with this. The biggest risk is the debt limit and any tightening of financial conditions," said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch.
The Fed Wednesday said in its post-meeting statement that it would soon follow through on the balance-sheet reduction. It plans to slow down purchases of Treasury and mortgage securities to replace those on its balance sheet that are maturing.
Strategists say the threat of a government shutdown could affect financial markets, and that could slow the Fed's plans. In 2011, the debt ceiling and budget battle led to a downgrade of the U.S. credit rating.
Cabana said he believes it's quite possible that Congress and the Trump administration will have a hard time agreeing to a budget, and the debt ceiling, which is the legislative limit on how much debt the government can take on, could be caught up in the issue.
"[Treasury Secretary Steven] Mnuchin told us that the government would be able to fund itself through September. Once we get into October, it's much more uncertain how long it will last. Our concern is they run out of funding in early October. The current resolution financing the budget runs out in the end of September as well. So you could have a coupling of these two issues," he said. "If there's no budget passed and the debt limit is associated with that, the market could become more apprehensive about the Treasury's ability to make good on its obligations in October."