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  • 2024-10-05

Fed's Logan Backs Gradual Rate Cuts, No Reason to Halt QT

On Monday Eastern Time, Dallas Federal Reserve President Logan stated that, due to the various uncertainties in the economic environment, the Federal Reserve should be cautious about interest rate cuts, and she supports the use of a "gradual" approach to rate reductions.

In her speech before the annual meeting of the Securities Industry and Financial Markets Association (SIFMA), Logan said that as the Federal Reserve gradually lowers policy rates, the U.S. inflation rate could potentially fall to the 2% target set by the Fed, and the labor market would not cool off too quickly.

She stated: "If the economy evolves as I currently anticipate, then a strategy of gradually lowering the policy rate to a more normal or neutral level could help manage risks and achieve our objectives. However, there may be many unforeseen shocks (such as economic, political, market, and other sudden events) that could affect this process, and these shocks could alter the path, pace, and ultimate level of interest rate adjustments."

Last month, the Federal Reserve cut interest rates by 50 basis points more than expected to prevent the labor market from cooling off too quickly. However, since then, U.S. employment market data has been much stronger than anticipated, with employment growth accelerating monthly and the unemployment rate dropping to 4.1%. As a result, financial markets are currently expecting the Federal Reserve to cut rates by 25 basis points next month.

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Logan pointed out that the Federal Open Market Committee (FOMC) will need to maintain flexibility and make adjustments as necessary. Logan has spent most of her career working in the market department of the New York Fed, where she managed the Fed's System Open Market Account. In this speech, she also discussed the dynamics of the Federal Reserve's balance sheet and financing markets.

Logan stated that liquidity in the market remains "very ample" at present, and there is no need to stop shrinking the balance sheet soon. Although the use of the Federal Reserve's overnight reverse repurchase agreement tool (ON RRP) has been declining over the past two years, the current balance is still much higher than pre-pandemic levels, providing a certain buffer for the financial system.

However, she also noted that, in the long term, the balance of the overnight reverse repurchase agreement tool should be reduced to a negligible level, indicating that the Federal Reserve expects future market liquidity to decrease, closer to pre-pandemic conditions.

Logan also added that, despite some recent pressures in the money market, she believes these pressures are temporary, and in order to achieve the long-term goal of monetary policy, which is to reach a "neutral" balance sheet size that neither stimulates nor restrains the economy, these minor market pressures can be tolerated in the short term.

Federal Reserve officials have been reducing the size of the balance sheet. During the COVID-19 pandemic, to lower market interest rates and support economic development, the Federal Reserve bought a large amount of U.S. Treasury bonds and mortgage-backed securities (MBS), causing the balance sheet to grow to nearly $9 trillion. This year, the Federal Reserve has slowed the pace of balance sheet reduction.

The Federal Reserve's balance sheet reduction process has been ongoing for more than two years, reducing its total balance sheet size from a peak of $9 trillion to the current level of $7.1 trillion. After the pandemic, the Federal Reserve is seeking to withdraw unnecessary liquidity as part of the normalization of monetary policy.Logan also emphasized that all banks should establish strong emergency liquidity plans to address liquidity shortages that private markets cannot meet, and every bank in the United States should be operationally prepared to use the discount window.