With the current Emerging Market rout growing stronger by the day as the dollar surges, crushing carry trades left and right and sending EM currencies plunging, in the process validating the June warning from RBI governor Urjit Patel who warned the Fed that continued liquidity extraction in the form of balance sheet shrinkage will only make contagion worse, there has been a growing debate just when the Fed will be forced to halt its quantitative tightening.

Yesterday, none other than former NY Fed strategist and current Credit Suisse analyst Zoltan Pozsar, acknowledged by many as the authority on repo market dynamics, shadow liquidity and Fed balance sheet strategy, warned that the U.S. central bank may soon have to make a choice between activating an overnight facility for repurchase agreements or halting its balance-sheet reduction earlier than many market participants expect. And, as Bloomberg reported, Pozsar said that policymakers are unlikely to pursue the option of a new facility until alternatives have been exhausted, meaning a premature end to the taper is the most likely outcome. Meanwhile, both Morgan Stanley and Royal Bank of Canada analysts said last month the balance-sheet runoff could end as early as 2019, while Goldman Sachs strategists in May said they’re assuming an end around April 2020.

“A rethink of the Fed’s operating regime will be necessary”, Pozsar wrote. “We are transitioning from an environment where reserves are excess to an environment where collateral is excess. The Fed’s monetary toolkit has to adapt”.

The dilemma facing the Fed is how to keep the overnight fed funds rate within its target band as it tries to normalize policy. The task has been complicated, as Bloomberg adds, by the Treasury’s need to finance the growing federal budget deficit and a deluge of bill issuance that’s helped push higher a whole swath of short-term funding rates, including the effective fed funds rate and forced the Fed to decouple the IOER from the upper band of its fed funds rate corridor.