Unlock stock picks and a broker-level newsfeed that powers Wall Street.Upgrade Now
Logan Favors Short-Term Assets When Fed Purchases Resume
Catarina Saraiva
5 min read
(Bloomberg) -- Federal Reserve Bank of Dallas President Lorie Logan said it would be appropriate, in the medium term, for the US central bank to purchase more shorter-term securities than longer-term ones so that its portfolio can more quickly mirror the composition of Treasury issuance.
At present, the Fed is winding down its holdings of Treasuries and mortgage-backed securities. When the Fed needs to start expanding its portfolio once again, Logan said, policymakers should consider proactively purchasing more short-term assets to allow the central bank’s balance sheet to reach a neutral makeup more quickly.
“Although I view a neutral mix of purchases relative to issuance as appropriate in the long run, it would make sense in the medium term to overweight purchases of shorter-dated securities so as to more promptly return the Fed’s holdings to a neutral allocation,” Logan said Tuesday in prepared remarks for a speech in London.
Logan, who previously managed the central bank’s portfolio at the New York Fed, spoke at a balance-sheet policy conference hosted by the Bank of England. She spoke broadly of her support for the existing ample reserves funding framework and noted several ways to make it work effectively and efficiently.
The roughly $6.8 trillion balance sheet currently includes about $2.2 trillion in agency mortgage-backed securities, but policymakers have said they’d like their asset holdings to consist mostly of Treasuries in the future.
“Roughly matching the duration of our assets and liabilities would reduce these fluctuations and could, thus, enhance the effectiveness of policy communications,” Logan said.
The Fed has been shrinking its holdings of debt since June 2022. It’s currently allowing up to $25 billion in Treasuries and $35 billion in mortgage-backed securities to mature each month without reinvesting the returned principal — a process known as quantitative tightening. It slowed to that pace in June, after initially allowing up to $60 billion in Treasuries to run off its balance sheet each month.
Market participants have moved forward their estimates for when the Fed would end this process, with some — following the release of the central bank’s Jan. 28-29 meeting minutes — speculating that the central bank might soon pause the runoff. Those showed that “various” policymakers said it might be appropriate to slow down or pause the pace of runoff until Congress resolves the debt-ceiling debate.
Logan did not comment about the timing of such a slowdown or pause in Tuesday’s prepared remarks.
The US government reached its statutory limit for outstanding debt in January and the Treasury Department has since been using so-called extraordinary measures to extend its ability to pay the federal government’s expenses, including leaning on its cash pile.
In response to a question about the debt ceiling, Logan said the Fed would face “an important question” if the Treasury quickly rebuilt its primary account, and pointed to the spread between money market rates and the interest rate on reserves balances as a key indicator.
“The important point is that money market rates right now are well below IORB, and all the other metrics that staff are reviewing don’t suggest that we’ve reached that ample level,” Logan said. “So any decision along those lines would not mean stopping the runoff.”
The Fed minutes from January also showed that policymakers were briefed on possible ways to structure secondary-market Treasury purchases after the end of the balance-sheet runoff. Many officials expressed support for structuring purchases in a way that moved the portfolio’s composition closer to that of outstanding Treasury debt.
Ample Reserves Regime
The Dallas Fed chief, a key official when the central bank was implementing the so-called ample reserves regime — the rate-control framework put in place following the historic stimulus measures wielded during the Great Financial Crisis — reiterated her support for it in the US.
“While it remains conceptually possible to implement monetary policy today with scarce reserves, developments since the GFC would complicate the task of fine-tuning reserve supply to hit a point on the steep portion of the demand curve,” Logan said. “The ample-reserves regime simplifies rate control because fluctuations in reserve supply and demand don’t require frequent and precise offsetting central bank actions.”
Other developed-nation central banks, including the European Central Bank, the Bank of England and the Reserve Bank of Australia are revising their policy implementation frameworks as economies move away from times of crisis, though Logan noted that institutions are adopting shared principles for their balance sheets.
“The surface differences, to my mind, reflect central banks’ natural adaptation to unique characteristics of the financial systems in which they operate,” Logan said.
Logan noted that reliable “ceiling” tools are still important, even in an ample-reserves regime, which is also known as a floor system, to backstop against mistaken estimates and potentially as a routine source of reserve supply.
Logan also proposed the potential creation of a discount window facility that would auction a fixed quantity of loans each day in an effort to encourage banks to use the often-stigmatized emergency lending window.
The Dallas Fed chief rejected calls from some quarters to revive liquidity in the overnight interbank lending market, known as the fed funds market.
“Only very large spreads between money market rates and interest on reserves would likely suffice to revive the US interbank market — and that would be very inefficient,” she said.
--With assistance from Alexandra Harris and Irina Anghel.
(Updates with detail from Q&A from 10th paragraph.)
