A Federal Reserve Bank of New York official who manages the implementation of monetary policy which shows on Wednesday that the central bank has space to increasingly reduce the balance sheet, while recording the issue of financial management government will create challenges for the short term process.
Market indicators “tell us that the current reserve conditions are abundant, as has happened for some time,” said Roberto Perli, who manages the Fed System open market account, bond portfolio, cash and other assets, which is currently at $ 6.8 trillion. He spoke before the meeting of money marketers from New York University.
Perli comments show that everything is the same, there is no need that will immediately end the contraction of Fed’s ownership, known as quantitative tightening, or QT. But with that, there are several challenges that will soon be navigated.
After more than double the size of its ownership due to efforts to improve the economy during Pandemi Covid-19, since 2022 Fed has allowed Treasury bonds and the mortgage it has to expire and not replaced, which has allowed the central bank to cut more than $ 2 trillion from its ownership.
The Fed seeks to eliminate sufficient liquidity from the financial markets to enable normal money market volatility and to maintain strong control over the level of federal funds, the main tool is to achieve the objectives of its monetary policy. The challenge for The Fed is that it is not sure where the stop for withdrawal.
Further complicated problems are the government’s uneasy financial needs and debt ceilings that limit loans. Treasury efforts to manage the situation tend to lead to uneasy money market conditions, and as a result, Fed officials are pondering slowing down or stopping while stopping QT until more clarity arrives.
“The longer the balance sheet continues while the debt ceiling situation remains, the higher the risk that, after the settlement of the debt ceiling, reserves can quickly decline to the level that can result in a substantial volatility in the money market,” Perli said, while not the tip of his hand about what he expected to happen with QT.
Speaking on Tuesday, Fed New York President John Williams said “Our strategy has not changed” and endgame for QT remains. Slowing or stopping QT, if both of them occur, allow Fed to “ensure” it is not too far from drawdown and take too much liquidity from the financial markets, he said.
In his remarks, Perli also said he hoped that the Rego Reverse Fed facility could shrink further, adding that maybe the central bank would add a repo facility operation to stand in the morning at the next quarter change, as happened at the end of the year. Perli also said the Repo market condition, where banks and others borrowed and lent bonds and cash, continued to normalize.
Source: Reuters
