Dallas Fed President Lorie Logan stressed in a speech on Friday that while the Federal Reserve is slowing down its balance sheet runoff, it doesn’t imply a complete halt. Currently, the Fed is reducing its balance sheet by allowing the securities it acquired to mature, a process known as quantitative tightening (QT). During the pandemic, the central bank increased its purchases of Treasury securities and mortgage-backed securities to inject liquidity into banks and stabilize financial markets.
Logan highlighted that the pace of balance sheet reduction impacts how banks manage outflows, redistributing funds, and the overall market dynamics. Slowing down the runoff allows for a more gradual approach to reaching the desired level of reserves, reducing the risk of excessive market pressures arising from QT.
She emphasized that the decision on when to stop the balance sheet reduction should be based on observations of money market volatility and spreads. However, this doesn’t mean completely eliminating rate volatility or narrowing money market spreads to zero. Logan clarified that it’s not the role of monetary policy to eliminate all minor frictions in the market.
As a group, financial stocks are trading slightly in the red on Friday morning, with the Financial Select Sector SPDR ETF (NYSEARCA:XLF) edging down 0.1%.