Federal Reserve Bank of Dallas President Lorie Logan on Monday hinted at the possibility of further rate cuts by the Federal Reserve as the process of balance sheet reduction continues.
Speaking at the annual meeting of the Securities Industry and Financial Markets Association in New York, Logan underscored the strength and stability of the economy but also acknowledged significant uncertainties, particularly around the labor market and inflation targets.
Logan explained that if the economy performs as expected, a gradual approach to lowering the federal funds rate to a more neutral level would be beneficial to managing risks and achieving the Fed’s goals. She emphasized the need for the Fed to remain flexible and adjust its policies as necessary.
The discussion comes at a time when market participants are questioning whether the Fed will implement the 0.5 percentage point interest rate cuts forecast at its September meeting. The debate is being fueled by recent labor market data that suggests a robust labor sector, potentially reducing the need for aggressive rate cuts.
Logan also touched on the ongoing quantitative tightening (QT) process, in which the Fed is reducing its holdings of mortgage and Treasury securities purchased during the pandemic. Since 2022, the Fed has reduced its balance sheet from a peak of $9 trillion to $7.1 trillion, with the expectation of continuing this trend. Logan sees no immediate reason to stop QT, stressing that it complements interest rate cuts with a normalization of monetary policy.
She noted that current liquidity in the markets is more than sufficient, as evidenced by money market interest rates being below the Fed’s interest rate on reserve balances. Logan suggested that the latest in money markets was not worrisome and that the Fed should tolerate temporary tensions to achieve efficient balance sheet size.
Going forward, Logan expects money market interest rates to closely follow reserve interest rates. She sees no urgent cause for concern about a rapid sale of mortgage bonds from the Fed’s balance sheet. Logan reiterated the importance of banks preparing for liquidity shortages, noting the availability of the Fed’s Discount Window Liquidity Facility for such situations.
Reuters contributed to this article.
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