MNI POLICY:Quarles:Ample Reserves Don't Mean Big Balance Sheet

--Current Stance Of Monetary Policy Appropriate

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve should consider operating with a

slimmer ample reserves framework by adjusting other rules to improve market

trading, Governor Randal Quarles said Thursday.

     "It is reasonable that we ask ourselves whether it may be possible to

operate with a lower level of reserves and remain consistent with the ample

framework," Quarles told the Money Marketeers of New York University.

     The liquidity regulation and supervisory regime - including the Liquidity

Coverage Ratio, Regulation YY, and resolution planning - makes a more resilient

financial system but has also caused large banks to double liquid asset buffers,

he said.

     While Quarles doesn't propose decreasing banks' liquidity buffers, he

explored options to facilitate the use of high-quality liquid assets beyond

reserves to meet needs projected in banks' stress scenarios.

     "We know that reserves have special characteristics when it comes to

stress," even with regulations that see no preference for reserves versus

Treasury securities, Quarles said. 

     Options include a policy where firms can assume the discount window in

stress scenarios or setting up a standing repo facility. Vice Chair for

Supervision Quarles also said the Fed is considering changing how a score is

calculated for the surcharge on global systemically important banks.

     Creating a standing repo facility is also still of interest, "but there may

be benefits to working with the tools we already have," Quarles said.

     Quarles reviewed options for a policy framework review coming this year.

Balance sheet policies including the use of large-scale asset purchases are more

credible if "we can show that there is not a persistent ratcheting-up effect in

the size of the Fed's asset holdings," he said.

     Forward guidance and large-scale asset purchases in the wake of the

financial crisis "likely made up some, though not all, of the shortfall," and

Quarles suggested making unconventional tools "as conventional as possible."

     The experience of using these tools will likely facilitate their prompt and

effective deployment in future episodes when there is no space for further rate

cuts, he said.

     Policy remains in a good place to support continued economic growth, a

strong labor market, and inflation returning to target, he said. "I view the

current stance of monetary policy as appropriate given the economic outlook and

relatively muted inflation pressures," he said.

     Notable risks still threaten growth, both overseas and at home even after

trade deals with China, Mexico and Canada. That includes weak investment and the

outbreak of the Wuhan coronavirus, he said.

     "In addition to the human toll, the virus also threatens significant

economic disruption, particularly for China and its neighbors, as workers and

consumers stay home and normal activities are otherwise disrupted. It is too

early to say what the full economic effect of the outbreak will be, and this

situation will require careful monitoring," Quarles said.

     The labor market continues to "perform remarkably well," he said, adding

"some additional slack remains in the market, particularly in the potential for

higher labor force participation," he said.

     Inflation is expected to move back to the 2% target over the medium term,

he said, in part as some unusually low readings in early 2019 pass out of the

data.

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

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