MNI: Fed Shift To Less Long-Dated Bonds To Take Years-Logan
MNI (WASHINGTON) - Federal Reserve Bank of Dallas President Lorie Logan said Tuesday the Fed should eventually purchase more Treasury bills to return the central bank's assets to a more neutral posture but that would likely take many years to achieve.
"Although I view a neutral mix of purchases relative to issuance as appropriate in the long run, it would make sense in the medium term to overweight purchases of shorter-dated securities so as to more promptly return the Fed’s holdings to a neutral allocation," said Logan. Her prepared remarks did not touch on a potential near-term slowdown or pause of the Fed's balance sheet drawdown, which according to minutes last week was debated at the central bank's January meeting.
At present, the Fed’s portfolio is "significantly overweight longer-term securities and underweight Treasury bills" and "when we eventually reach an efficient level of reserves and need to begin expanding the portfolio in line with growth in demand for our liabilities, those purchases will also be small relative to existing holdings," she said.
"In this context, it could take many years to reach a neutral mix of holdings by structuring our purchases to be proportional to issuance."
The January minutes showed officials are considering a shift to a bond portfolio that mirrors the maturity of the outstanding Treasury market. The Fed's Treasury holdings are currently skewed towards long-dated debt, suggesting it could reinvest more in shorter-dated securities over some time period.
LOAN FACILITY
Logan, previously manager of the System Open Market Account for the FOMC, used her remarks at a Bank of England research conference to also offer the idea of a new facility auctioning discount window loans.
"Auctioning a fixed quantity of discount window loans each day could encourage banks’ operational readiness and demonstrate that borrowing is a normal activity for healthy firms," she said, suggesting it would improve efficiency and effectiveness of policy implementation. "Such a facility might also smooth the redistribution of reserves around the banking system."
"If the Fed held a daily lending auction, the depository institutions most in need of reserves on any given day would likely place the highest bids, automatically redistributing liquidity away from firms with less need," she said, emphasizing the central bank is not making any changes soon. "Even beginning to consider such a tool would require substantial conversation, analysis and learning from the experience of other central banks."