Fed’s Logan backs first slowing, then gradually ending, balance-sheet runoff

The Federal Reserve should first slow the pace of its balance-sheet reduction and then gradually end the program, to reduce the likelihood of having to stop it abruptly, Dallas Fed President Lorie Logan said Saturday.

“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, in a talk at the American Economics Association meeting in San Antonio, Texas.

Logan didn’t give any hint of when the Fed might end its balance-sheet reduction.

Also read: Fed’s Logan won’t take possibility of another rate hike off the table ‘just yet’

She said the Fed should slow the balance-sheet shrinkage when overnight reverse repo balances fall to a low level.

The Dallas Fed president endorsed a discussion in coming weeks “to consider the parameters” that will guide any decision to slow the runoff of the balance sheet.

The decision to consider the metrics of slowing the pace of balance-sheet runoff was first disclosed last week in the minutes of the Fed’s December meeting. 

Since the summer of 2022, the Fed has been rapidly letting almost $100 billion of maturing securities roll off its balance sheet each month. So far, the Fed’s balance sheet has shrunk by about $1.3 trillion, bringing it down to $7.7 trillion. 

Logan said there are still “more than ample bank reserves,” and more than ample liquidity overall in the financial system.

The Fed has never specified what level it wants the balance sheet to reach. The central bank wants banks to hold “ample reserves.”

Fed Chairman Jerome Powell has said the Fed intends to keep shrinking its balance sheet even if the central banks starts to cut interest rates. 

The first time the Fed tried quantitative tightening was in 2017. It ran into unexpected problems in September 2019 and ended the program early.

The balance sheet was around $3.8 trillion in August 2019 just before the first QT program ended.

In the wake of the coronavirus pandemic, the Fed’s balance sheet ballooned as the central bank bought unwanted securities in exchange for cash and started emergency lending programs. The balance sheet peaked at about $9 trillion.

Paul Ashworth, chief North America economist for Capital Economics, said he expects the Fed to reduce the size of its balance-sheet rundown by June, with quantitative tightening ending in December.

“There is still a chance that if economic growth slows more than we expect, the Fed could ease QT immediately,” Ashworth added, in a note to clients. 

Economists at Bank of America Securities think the QT program will end entirely in June.

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