Fed’s Hammack sees extra runway for Fed steadiness sheet cuts

By Michael S. Derby

NEW YORK (Reuters) -Federal Reserve Financial institution of Cleveland President Beth Hammack mentioned on Wednesday situations nonetheless assist ongoing reductions within the central financial institution’s steadiness sheet, including she believes some energetic administration of market liquidity through Fed interventions is suitable to her.

“We nonetheless seem to have greater than sufficient reserves within the system in order that energetic administration is not wanted,” Hammack mentioned within the textual content of a speech ready for supply in New York earlier than a gathering of the Cash Marketeers of New York College. She didn’t touch upon the financial outlook in her ready remarks.

With extra room to run on shrinking Fed holdings — the method extensively known as quantitative tightening, or QT – Hammack mentioned that as she sees it, holding Fed holdings too giant comes with dangers for monetary stability.

“To the extent that a big steadiness sheet with more-than-ample reserves dampens cash market volatility, it additionally promotes risk-taking in monetary markets,” she mentioned.

Hammack additionally mentioned that over time, momentary market interventions by the Fed to handle short-term swings in volatility may very well be warranted.

“There could also be situations wherein the Federal Reserve would wish so as to add momentary liquidity,” she mentioned, noting “in that case, nothing would forestall” the New York Fed “from utilizing its normal instruments of open market operations to keep up the fed funds goal vary even when reserves had been ample.”

Hammack tackled the outlook for the central financial institution’s steadiness sheet after it determined final month to considerably sluggish the continued drawdown of its holdings of Treasury and mortgage bonds. Since 2022 the Fed has been permitting bonds it owns to mature and never get replaced. It has twice slowed the tempo of that contraction to raised permit policymakers to make sure they don’t seem to be pulling out liquidity too swiftly.

Hammack mentioned in her speech she supported the slower drawdowns. Whereas there have been nonetheless sufficient reserves within the system to press ahead, “I anticipate that by slowing the tempo of runoff, we will let the method proceed for longer,” she famous.

“I interpret this slower tempo to emphatically not be a sign of a completely bigger steadiness sheet than would have been the case with no slowdown.”

Through QT, the Fed has been withdrawing cash it added in the course of the COVID-19 pandemic and its aftermath. Bond purchases geared toward stabilizing markets and offering stimulus greater than doubled the scale of Fed holdings to $9 trillion, and the contraction course of has introduced the steadiness sheet right down to $6.8 trillion.