Federal Reserve Bank of Dallas President Lorie Logan said Monday she sees more rate cuts for the central bank and suggested she sees no reason the Fed can’t also shrink its balance sheet.
“If the economy develops as I currently expect, a strategy of gradually reducing the policy rate to a more normal or neutral level can help manage risks and achieve our objectives,” Logan said in the text of the speech to be delivered before the Securities. Annual meeting of the Industry and Financial Markets Association in New York.
“The economy is strong and stable,” Logan said, but “significant uncertainties remain” about rising risks to the labor market and continued risks to the Fed’s inflation targets. The Fed “should remain nimble and willing to adjust if necessary,” he said.
Logan spoke as market participants are currently debating whether the Fed will be able to achieve the half percentage point of year-end rate cuts it outlined at its September policy meeting. While inflation is easing, recent jobs data suggests a stronger-than-expected labor sector, suggesting to some that the Fed may not need to be as aggressive in cutting interest rates.
Logan devoted much of her remarks to the ongoing process of drawing down the Fed’s balance sheet, known as quantitative tightening, or QT. Starting in 2022, the Fed is shedding the mortgages and Treasuries it bought to provide stimulus and smooth markets at the start of the pandemic. It has reduced holdings from a peak of $9 trillion to the current limit of $7.1 trillion, and Fed officials have suggested that process has room to go further.
Logan said she sees no need to stop anytime soon and noted that QT and rate cuts represent a normalization of monetary policy and are currently working in the same direction.
“Currently, liquidity appears to be more than abundant,” Logan said, noting that “one sign that liquidity remains in ample supply, rather than just abundant, is that money market rates continue to be generally very below’ the Fed’s remaining reserve rate. .
Logan said the recent volatility in financial markets is not surprising and should not trouble the Fed, noting “I think it’s important to tolerate normal, moderate, temporary pressures of this type in order to get to an efficient balance sheet size.”
Logan said that over the long term she expects there to be only negligible balances in the Fed’s reverse repos facility. If some money is still in the facility in the future, he added, “a reduction in the (reverse repo) rate could incentivize participants to return funds to private markets.”
Logan said that over the long term it is likely that money market rates will be close to or just above rates on reserve balances. He also said the Fed selling mortgage-backed bonds it owns to get them off the balance sheet more quickly “is not a short-term issue in my view.”
Logan also reiterated that “all banks” should have plans to deal with liquidity shortfalls and be ready to use the Fed’s liquidity facility if needed.
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Reference;
Reuters (2024) Fed’s Logan eyes more gradual rate cuts amid more balance sheet cuts By Reuters, Investing.com. Investing.com. Available at: https://www.investing.com/news/economy-news/feds-logan-eyes-more-gradual-rate-cuts-amid-more-balance-sheet-cuts-3672984 (Accessed: 21 October 2024).
