MNI POLICY: Fed's Logan: Corporate Bond Purchases Could End

By Evan Ryser

     WASHINGTON (MNI) - The Fed's purchases of high rated corporate bonds and

corporate ETFs could slow to a halt if market conditions continue to improve,

Lorie Logan, the manager of the System Open Market Account at the New York Fed

said Wednesday.

     She added that the Fed will adjust its Treasury and mortgage-backed

securities purchases as needed to ensure adequate liquidity without targeting

any particular level of yields. 

     Corporate spreads remain elevated, but "if conditions continue to improve,

Fed purchases could slow further, potentially reaching very low levels or

stopping entirely," Logan told a webinar hosted by the Securities Industry and

Financial Markets Association. 

     The Fed has purchased a total of USD10.7 billion in corporate bonds since

beginning purchases May 12. In the last week, the Fed's corporate bond purchases

have had a daily average of USD142 million, a pace that fell by roughly half

since June highs. 

     --'WILL REMAIN VIGILANT'

     "It's fair to say that we've seen significant progress, and we've made

significant progress in terms of calming markets," she said. 

     "We will remain vigilant for signs of deterioration in market functioning

and flexible in adjusting our operations as needed," she added, referring to

Treasury and MBS purchases. 

     Logan pointed out in her prepared remarks that "Our assessment of market

functioning is focused on indicators of market liquidity and efficient prices --

not on the level of yields."

     The Fed's emergency programs stand ready to support if downside risks do

materialize, she said.

     -- BALANCE SHEET DECLINE

     The central bank's balance sheet declined in recent weeks from roughly

USD7.2 trillion to USD6.9 trillion, as dollar liquidity swaps declined and the

use of the Fed's operations in the market for repurchase agreements, or repo,

dropped to zero for the first time in 10 months.

     Logan called the decline in the Fed's repo book a "notable development" and

said the balance sheet drop is a sign of healthy markets. 

     Some have associated the Fed's balance sheet drop with a reduction in

policy accommodation. "I don't really see it that way," Logan said. 

     "What has driven that decline is the healing in the short-term funding

markets," she said. "If conditions should deteriorate then we would pick back

up."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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