MNI BRIEF: Barr Says Fed Could Continue QT While Cutting Rates

The Federal Reserve may not have to stop shrinking its massive balance sheet when it begins cutting the fed funds rate, according to Fed Vice Chair for Supervision Michael Barr.

"You might say maybe there's a conflict there between financial stability goals and monetary policy, but I think we can actually work our way towards normalization in both of these tools separately," he said in Q&A after a speech Monday, where he said interest rates may be "at, or near" sufficiently restrictive levels needed to get inflation down to 2%. "Both these tools can be used I think in a coherent fashion. They don't necessarily create conflicts between two goals that we're talking about."

"If we're in an interest rate environment where rates are coming down because we're achieving our inflation goals, then you can see runoff being able to continue until we hit the ample level of reserves," Barr said. "If we're in an environment where interest rates are coming down because the economy is in serious economic straits, then we can use ... the balance sheet to fight back against that and end the tightening cycle." (See: MNI INTERVIEW: RRP Drop Creates Headroom For Fed QT)