Fed's Logan: Fed will feel its way to balance sheet limit
By Howard Schneider
NEW YORK (Reuters) — The U.S. Federal Reserve will need to slow its asset purchases and feel the way towards a low point for its asset holdings once a key financial buffer is exhausted, Dallas Fed president Lorie Logan said on Friday.
Logan reiterated that as long as financial institutions keep using the Fed's overnight reverse repurchase facility, policymakers can feel confident that banks have enough reserves.
But use of the ONRRP program, at it is known, has been declining fast, from a high of around $2.3 trillion last year to about half a trillion as of the end of last month. Fed officials have begun discussing when and how to the slow the runoff of assets accumulated to try to fight the economic impact of the pandemic, and avoid hitting a point where bank reserves become scarce — a potential trigger for market volatility.
«When ONRRP balances approach a low level, it will be appropriate to slow the pace of asset runoff. As long as there are significant balances in the ONRRP facility, we can be confident that liquidity is more than ample in the aggregate,» Logan said. Once the repo facility hits zero, «there will be more uncertainty about how much excess liquidity remains.»
«I don’t think we can identify the ample level in advance. We’ll need to feel our way to it by observing money market spreads and volatility,» said Logan, former head of the markets desk at the New York Fed.
Logan's comments were in response to a research paper documenting that the effort underway by central banks to reduce their asset holdings has had much less impact on markets than the corollary expansion of balance sheets during weakening economic conditions.
Logan said she felt the «asymmetry» was largely due to the
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