MNI: Fed To Continue Debate On Balance Sheet - Hammack, Bostic

Two Fed presidents said Friday the FOMC will continue discussing balance sheet policies in the coming weeks, noting varying degrees of comfort among policymakers for volatility in money markets after funding pressures prompted the Fed to announce an end to QT this week. 

"My viewpoint is that we are in an ample reserves regime," Cleveland Fed President Beth Hammack said in Q&A at a Dallas Fed event. "I want to see repo rates and money market rates trading roughly in line, on average with IORB."

The tri-party general collateral rate or TGCR generally stays in line with the Fed's interest paid on reserve balances, but on days like today when there are USD58 billion of Treasury coupon settlements, month end and Canadian year end, "you see more elevated pressure," she said. 

Banks have access to the Fed's standing repo facility and discount window backstops, the borrowing rates of which are set at the top of the Fed's target range, "but it looks like a leaky ceiling," she said. "It looks like some things under the balloons are floating away when banks aren't participating and taking advantage of those tools that we have, like the standing repo facility, for them to be able to monetize it." 

Hammack agreed with Dallas Fed President Lorie Logan that it may be time to look beyond the fed funds rate as the benchmark rate. "It's time for us to look more broadly, because we're we have very effective control over a USD100 billion market, but the market is USD4 trillion, and so you've got USD3.9 trillion that's happening over here. We've got to be able to have some amount of control over there to be implementing effective monetary policy." 

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Atlanta Fed President Raphael Bostic said he prefers a more abundant reserves regime, saying he's "very comfortable" with the Fed's decision to end QT as of December 1. 

"I'd like to see more in the buffer," he said, noting concern about ructions in the money markets. "We're already seeing volatility. Going any appreciably lower than where we are now is just going to add to that and lead to disruptions."

As the economy continues to grow and markets evolve, the Fed will need to discuss how to position itself to ensure stable functioning in markets, Bostic said. "Those will be conversations that happen over the next several weeks," he said. 

Hammack signaled more comfort with the added money market volatility that comes with a smaller balance sheet but acknowledged her colleagues have different preferences on whether reserves should be more abundant.  

"There's benefit for us in having the smallest possible balance sheet that we can while operating in that ample reserves framework," Hammack said. "But it requires not just us watching markets and understanding what that growth in reserves and currency is going to be. It also requires the primary dealers to help transmit and redistribute reserves throughout the system in an efficient fashion." (See: MNI INTERVIEW: Fed Soon To End QT On Funding Strains - Wright)