A senior official at the Federal Reserve Bank of New York said the central bank’s balance-sheet runoff has been running smoothly with “no significant” disruptions to markets, but the Fed will continue to monitor for risks.
(Bloomberg) — A senior official at the Federal Reserve Bank of New York said the central bank’s balance-sheet runoff has been running smoothly with “no significant” disruptions to markets, but the Fed will continue to monitor for risks.
“Recently, our implementation framework has confronted a number of stress tests and performed quite well,” said Roberto Perli, the manager of the System Open Market Account who oversees the Fed’s portfolio. “This is all encouraging, but we remain cognizant of the risks and uncertainties ahead.”
Perli spoke Tuesday in remarks prepared for the National Association for Business Economics meeting in Dallas.
After raising the benchmark federal funds rate by more than five percentage points over the past year and a half, a majority of US central bankers at their September policy meeting projected it would be appropriate to enact one more quarter-point increase by the end of 2023. But some officials have said the recent rise in Treasury yields could further restrain the economy and lessen the need for additional increases.
The US central bank is shrinking its massive balance sheet — after it roughly doubled in size during the pandemic — through a process known as quantitative tightening, or QT. The Fed has offloaded more $1 trillion in bond holdings since it began reducing its portfolio last year, with few signs of the financial market strains that spooked policymakers the last time they oversaw such a program.
As the Fed removes liquidity from the banking system, money-market funds and other eligible financial firms are parking less cash at the Fed’s facility for reverse repurchase agreements, or reverse repo.
There is nearly $1.3 trillion parked with the program, down from the all-time high of $2.55 trillion seen at the end of 2022. If the balance-sheet reduction begins to eat more into reserves parked with the Fed, it could lead to scarcity and push the central bank to rethink the pace of QT.
Perli said usage of the reverse-repo program could decline more, “possibly to low levels.” But he said officials will watch markets closely for signs of stress and that the Fed intends to slow and then stop its balance-sheet reduction while reserves are still above the levels considered “ample.”
That moment has not arrived, and officials will be watching money-market conditions for signs of stress, Perli said. “The commitee will make that judgment based on careful analysis and market monitoring that incorporates price signals from money markets as well as extensive market outreach and intelligence,” he said.
Perli’s speech mark his first public remarks since he started the role in February, taking over a position previously held by Dallas Fed President Lorie Logan.
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