Markets tweak Fed balance sheet views after comments from Dallas Fed chief
By Michael S. Derby
NEW YORK (Reuters) — Comments over the weekend from a key Federal Reserve official have shed new light on how the central bank might end its ongoing effort to shrink its bond holdings, causing some market participants to revise views on the process’ endgame.
Speaking on Saturday, Dallas Fed President Lorie Logan explained how contracting liquidity in money markets may sway the outlook for what’s commonly referred to as quantitative tightening, or QT. Logan’s voice on the issue is notable because before taking over the reins of her bank in 2022, she managed the New York Fed’s massive holdings of cash and securities and implemented the monetary policy decisions of the rate-setting Federal Open Market Committee.
QT complements aggressive Fed rate rises aimed at combating high levels of inflation and involves the central bank shedding Treasury and mortgage bonds it bought to provide stimulus and stabilize markets during the early stages of the coronavirus pandemic.
The Fed doubled the size of its balance sheet between the spring of 2020 and the summer of 2022, when its holdings topped out at $9 trillion. Since 2022, the Fed has been allowing just under $100 billion per month in Treasury and mortgage bonds to mature and not be replaced, and that’s caused Fed holdings to shrink to $7.7 trillion.
The Fed wants bank liquidity at “ample” levels that avoids dislocations in money markets and affords it firm control over short-term rates. But outside of saying the process has a long way to go, Fed officials thus far offered only cursory guidance about how they’ll end QT.
The almost certain end of Fed rate rises and the prospect of rate cuts this year have put the outlook for the balance sheet at the forefront
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