MNI: Logan - Fed Has Room To Run QT; Prefers Building T-Bills

Federal Reserve Bank of Dallas President Lorie Logan said Monday she expects temporary occasional pressures in money markets but there is still room to reduce reserves in the financial system, adding that over the medium term the central bank could overweight purchases of Treasury bills to better align the Fed's assets to match the market. 

"In the U.S., repo rates have averaged about 8 basis points below interest on reserves in recent months. That tells me we have more room to reduce reserves. We could see some temporary pressure around the tax date and quarter-end in September," said Logan, a former manager of the System Open Market Account for the FOMC, in prepared remarks. 

Logan did not comment directly on monetary policy and focused her remarks on post-pandemic challenges for monetary policy implementation and the Fed's balance sheet. 

She's been encouraged to see market participants using the Fed's Standing Repo Facility over the June quarter-end, and anticipates investors will similarly use the Fed's ceiling tools if necessary in September. "That will allow us to continue gradually bringing reserves to a more efficient level with market rates close to, but perhaps slightly below, interest on reserves on average over time." 

To get back to the long-run demand curve for reserves, central banks need to bring the average level of market rates up closer to interest on reserves in a sustained way, she said. "Moving the average level up closer to interest on reserves also requires some tolerance for temporary, modest moves above interest on reserves."

"If the central bank has confidence that market participants are willing and able to access its ceiling tools, it can simply reduce reserves until the point that ceiling tools see routine use," Logan said. (See: MNI INTERVIEW: Fed QT Has Room To Run Well Into 2026-Crandall) 

MATCHING THE MARKET

Logan also commented on the Federal Reserve’s USD4.2 trillion Treasury portfolio, which is currently weighted toward long-duration assets, reflecting large-scale asset purchases deployed after the financial crisis and again during the pandemic. 

"In my view, and as I’ve said before, the maturity structure of the consolidated government debt in the U.S. is a choice for the Treasury Department, not the Fed. There are many conceivable ways to maintain that division of responsibilities. But a simple and easily communicated one would be for the Fed, in the long run, to simply make its asset purchases proportional to Treasury issuance," she said in her remarks at a Bank of Mexico Centennial Conference. (See: MNI INTERVIEW: Fed-Treasury Accord Needed On Debt - Cochrane) 

"In the medium term, overweighting Treasury bills in our purchases could more expeditiously move our current mix of holdings closer to matching the market," the Dallas Fed chief said. "The FOMC has made no decisions on the long-run composition of its Treasury holdings, and I look forward to continuing to discuss this topic with my colleagues."