Dallas Fed President Laurie Logan indicated Monday that the Federal Reserve could cut rates further as the balance sheet reduction process continues.
Speaking at the Securities Industry and Financial Markets Association’s annual meeting in New York, Mr. Logan emphasized the strength and stability of the economy, but also acknowledged significant uncertainties, particularly regarding the labor market and inflation targets.
Governor Logan said that if the economy performs as expected, an approach that gradually lowers interest rates toward more neutral levels would be beneficial to managing risk and achieving the Fed’s goals, and that the Fed would have more flexibility. He emphasized the need to maintain and prepare. Adjust the policy as needed.
The discussion comes as market participants question whether the Federal Reserve will cut interest rates by 0.5 percentage point as expected at its September policy meeting. The debate has been fueled by recent employment data suggesting a robust labor sector, which could reduce the need for aggressive rate cuts.
Logan also mentioned the ongoing process of quantitative tightening (QT), which involves the Fed reducing its holdings of mortgages and government bonds purchased during the pandemic. Starting in 2022, the Fed has shrunk its balance sheet from a high of $9 trillion to $7.1 trillion, and this trend is expected to continue. Mr. Logan sees no immediate reason to cancel QT, noting that QT would complement interest rate cuts by normalizing monetary policy.
He acknowledged that current market liquidity is more than adequate, as evidenced by money market interest rates remaining below the interest rate on Federal Reserve reserves, and expressed concern about recent volatility in the money market. There was no need to do so, and the Fed suggested it should tolerate temporary pressure. Achieve an efficient balance sheet size.
Looking ahead, Logan expects interest rates on money markets to roughly match interest rates on reserve balances, and doesn’t think a rapid sale of mortgage bonds from the Fed’s balance sheet is an immediate concern. do not have. He reiterated the importance of banks preparing for liquidity shortages and the availability of the Fed’s Discount Window Liquidity Facility for such situations.
Reuters contributed to this article.
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