MNI: Fed's Logan, Waller See QT Continuing At Slower Speed
QT should continue until Fed sees signs in money market spreads and volatility that reserves are approaching ample levels.
The Federal Reserve's QT program is set to continue at a slower pace until policymakers see signs in money-market spreads and volatility that bank reserves are approaching a level that meets banks' demands, top officials Lorie Logan and Christopher Waller said in back-to-back remarks Friday.
The FOMC is set to begin discussing slowing the pace of runoffs at its March 19-20 meeting as reserves near "ample" levels, and the timing of any change will be independent of any changes to interest rates, Governor Waller said. It's also not possible to identify that ample level in advance as banks' demand for reserves vary significantly over time, Dallas Fed president Logan added.
Both officials noted significant money-market fund investment in the Fed's overnight reverse repo facility, though declining quickly, has buffered reserves levels and is a sure indication that QT can continue for now.
"We have an overnight reverse repurchase agreement facility with take-up of more than USD500 billion, and I view these funds as excess liquidity that financial market participants do not want, so this tells me that we can continue to reduce our holdings for some time," Waller said.
SLOW NOT STOP
The Fed will be less confident that liquidity is more than ample when RRP balances fall to low levels, and should slow runoffs "to approach the ample point more gradually, allowing banks to redistribute funds and the FOMC to carefully judge when we have gone far enough," Logan said.
"Moving more slowly can reduce the risk of an accident that would require us to stop too soon," she said in remarks prepared for the University of Chicago Booth School of Business's U.S. Monetary Policy Forum in New York.
Slowing QT doesn't mean stopping, she said. "Proceeding more gradually may allow the Fed to eventually get to a smaller balance sheet by providing banks with more time to adjust."
The recently established standing repurchase agreement facility serves as a backstop in money markets and "may allow banks to lower the level of reserves below what reserves would be without the facility, and it may provide a signal for when reserves are getting close to ample," Waller said.
MBS REDUCTIONS
Over the long run, Waller said he would like to see the Fed hold no more mortgage-backed securities and a shift in Treasuries holdings toward short-dated bills, but the FOMC can decide in the next couple years.
"Moving toward more Treasury bills would shift the maturity structure more toward our policy rate — the overnight federal funds rate — and allow our income and expenses to rise and fall together as the FOMC increases and cuts the target range," he said. "This approach could also assist a future asset purchase program because we could let the short-term securities roll off the portfolio and not increase the balance sheet."