New York Fed’s Logan says staff will watch money markets carefully

U.S. dollar banknotes are shown in this illustration taken February 14, 2022. REUTERS/Dado Ruvic/Illustration

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March 2 (Reuters) – The Federal Reserve’s nearly $9 trillion balance sheet has more room to downgrade than it did the last time the central bank cut its holdings and policymakers will continue to Watch the money markets closely, a senior bank official said on Wednesday.

The Fed’s standing repo facilities should also serve as a safety net to maintain market stability as the central bank reduces its bond holdings, said New York Fed executive vice president Lorie Logan.

“Staff will carefully monitor developments in the currency markets to understand changes in reserve conditions,” Logan said during a webinar hosted by New York University.

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Logan reiterated that policymakers want to reduce holdings primarily by letting their securities mature.

Some officials have said the Fed may need to consider selling some of its mortgage-backed securities later to speed the transition to a portfolio of mostly Treasury securities, but Logan said those decisions would be made later. Read more

She also shared some estimates of what the balance sheet runoff might look like. For example, principal payments from Treasury holdings could range from $40 billion to $150 billion per month, over the next few years, averaging around $80 billion.

The runoff from mortgage-backed securities could average about $25 billion a month over the next few years, but the exact pace is uncertain and affected by mortgage rates, she said.

The Fed’s balance sheet doubled after the central bank bought assets to stabilize markets and support the economy during the pandemic. Logan, who heads the New York Fed’s market operations, said asset purchases to support market functioning will be rare going forward.

“I expect the circumstances that warrant significant intervention to support market functioning will be extraordinarily rare,” she said.

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Reporting by Jonnelle Marte; Editing by Sam Holmes

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