Federal Reserve Bank of Dallas President and CEO Lorie Logan is cautioning against prematurely easing quantitative tightening, to account for potential economic downturns.
Speaking publicly on Jan. 6, Logan noted that the Federal Reserve has reduced its securities holdings by $1.3 trillion since early June. Bank reserve balances have risen by $350 billion to around $3.5 trillion as reduced balances in the Federal Reserve’s overnight reverse repurchase agreement more than offset the fall in securities holdings. Overnight reverse repurchase agreement facility balances remain around $700 billion.
“It’s appropriate to consider the parameters that will guide a decision to slow the runoff of our assets,” Logan noted. “In my view, we should slow the pace of runoff as overnight reverse repurchase agreement balances approach a low level. Normalizing the balance sheet more slowly can actually help get to a more efficient balance sheet in the long run by smoothing redistribution and reducing the likelihood that we’d have to stop prematurely.”
Logan said the financial system “almost certainly still has more than ample bank reserves and more than ample liquidity overall.” She cited a recent Senior Financial Officer Survey that revealed most banks had reserves well higher than their lowest comfortable levels.
Though Logan said GDP increased “at an unsustainably strong 4.9 percent annual rate in the third quarter, preliminary readings suggest the fourth quarter will be substantially slower.” Logan noted that geopolitical instability, weakness in the commercial real estate sector and the possibility that financial forecasts continue to be faulty could derail the currently improving outlook.
“If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made,” he added. “In light of the easing in financial conditions in recent months, we shouldn’t take the possibility of another rate increase off the table just yet.”