FED: Dallas's Logan Advocates For Standing Repo Enhancement As Reserves Shrink

Dallas Fed Pres Logan, formerly the head of the Fed's SOMA portfolio at the NY Fed, continued to advocate for banks to use Fed facilities including the standing repo facility and discount window in times of stress.

• Logan: "Depository institutions have greatly improved their operational readiness to borrow from the discount window. We should continue to reinforce the value of operational readiness so firms maintain these gains. And readiness is a partnership. At the Federal Reserve Banks, we are working to enhance our capacity to serve customers efficiently when they come to borrow...We should also continue to emphasize that borrowing from the window is an appropriate way for healthy banks to meet short-term funding needs—not something investors, ratings agencies or supervisors should criticize or question."
• "We can also enhance the SRF. As Roberto [Perli, current SOMA manager] described in his recent speech, experiments and market outreach by the New York Fed’s Open Market Trading Desk have found that conducting and settling the SRF operation in the morning, in addition to the current afternoon timing, makes the facility more effective by addressing intraday funding needs. I’m pleased that...the Desk plans to soon introduce regular early-settlement SRF operations. Central clearing of SRF operations would also make the facility more attractive and enhance rate control. That’s because central clearing would allow bank-affiliated dealers to net down their balance sheets when they borrow from the SRF and lend onward to other firms."
• Commentary at the panel discussion chaired by Logan was also noteworthy in pointing out that the Fed should look at a wide array of rates to signal reserve scarcity. Wrightson ICAP's Crandall noted that the Fed funds effective rate could be late in providing a signal: “The last way you want to measure the availability of liquidity in the overnight market is the fed funds market...the rate will eventually respond to changes in market conditions but it may very well be the last rate to do that.”
• Logan said (quoted by Bloomberg): “In my view, rate control is not just about keeping the fed funds rate in the target range...the fed funds market is small. And the FOMC’s desired stance of monetary policy must transmit smoothly into larger and broader markets — especially the repo market.”
• Of course, using the SRF and discount window are ways of ensuring market functioning while reserves shrink, allowing the Fed balance sheet to wind down further.