The United States Federal Reserve is nowhere near the point at which it will have to slow or stop the process of shrinking its balance sheet and it remains unclear when the appropriate time will be, the Fed’s head of monetary policy implementation said on Tuesday. NY.
“We remain aware of the risks and uncertainty ahead” when it comes to managing the central bank’s balance sheet, said Roberto Perli, head of the System’s Open Market Account, its huge reserve of cash and bonds.
Perli, whose comments come from the text of remarks he will deliver before a meeting of the National Association for Business Economics, said the Fed plans to “slow down and then stop” the process of shedding bonds at a point when the level of reserves in the banking system will be “somewhat above” of the level they consider consistent with “abundant” reserves.
Although heThe Fed is confident of being able to manage the process smoothly, “we know that the transition from abundant to broad will occur at some point, but we don’t know when”. For now, that moment does not seem to be on the horizon,” Perli said.
Since last year, the Federal Reserve has been in the process of allowing Treasury and mortgage-backed securities it acquired through aggressive stimulus efforts during the coronavirus pandemic to expire and not be replaced.
The goal is to complement the Federal Reserve’s aggressive short-term rate hikes, which have so far allowed nearly $1 trillion in bonds to mature and not be replaced.
The reduction of the balance sheet is intended to eliminate liquidity from the financial system. Federal Reserve officials have stated in recent comments that they believe this process still has a long way to go.
The challenge for Fed policymakers is that it is not clear when reserves start to run low, and they want to avoid that point because when reserves are tight the Fed faces difficulty controlling short-term interest rates.
“We are aware of the challenges that the transition can present, and the experience of September 2019 exemplifies them well,” Perli said. Officials then faced an unexpected shortage of reserves that caused money market rates to spike, forcing the Fed to borrow and buy Treasuries to restore market liquidity levels.
In his speech, Perli noted that the Federal Reserve has a new tool to address these types of problems, the Standing Repo Facility, which allows eligible companies to deliver Treasury bonds to the Federal Reserve in exchange for quick liquidity.
Perli also noted in his speech that the Federal Reserve can also engage in conventional repo operations to add liquidity to the market if necessary.
He added in his comments that the Fed’s rate control toolkit has worked well despite facing many big challenges.
“In the last three years we have witnessed a once-in-a-century pandemic, inflationary pressures that have made it necessary to rapidly increase official interest rates, a significant precautionary demand for liquidity by some banks, and uncertainty of investors in the face of the recent suspension of the federal debt limit and the subsequent rapid increase in short-term public debt.
Despite all this, he indicated, the Federal Reserve has maintained control of rates.
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