Federal Reserve Logan: Interest rate cuts are expected gradually, there is no reason to stop QT

Jinshi Data · 10/21 14:31

Dallas Federal Reserve Chairman Logan said on Monday that she believes the Fed will cut interest rates further in the future, and said she sees no reason for the Fed not to continue to reduce its balance sheet.

In a speech delivered before the New York Securities and Financial Markets Association's annual meeting, Logan said, “If the economy develops as I currently anticipate, a strategy to gradually reduce policy interest rates to a more normal or neutral level will help manage risk and achieve our goals.”

“The economy is strong and stable,” Logan said, but given the ongoing risks surrounding the labor market and the Federal Reserve's inflation target, “there is still significant uncertainty about the outlook.” The Federal Reserve “needs to be flexible and willing to make adjustments when appropriate,” she said.

At the time of Logan's speech, market participants are currently debating whether the Federal Reserve can cut interest rates by 50 basis points proposed at the September policy meeting for the rest of the year. Although inflation has been falling, recent employment data shows that the labor market is stronger than expected, which in the opinion of some people suggests that the Federal Reserve may not need to cut interest rates so aggressively.

Logan's speech focused on the Federal Reserve's ongoing balance-sheet reduction process, known as quantitative austerity (QT).

Since 2022, the Federal Reserve has been reducing its holdings of mortgage bonds and US Treasury bonds purchased during the COVID-19 pandemic to stimulate the economy and stabilize the market. It has reduced its holdings from a peak of $9 trillion to the current level of $7.1 trillion. Meanwhile, Federal Reserve officials said that there is still room for further operation of this process.

Logan said she doesn't think it's necessary to stop QT soon, and pointed out that both QT and interest rate cuts represent normalization of monetary policy, and are currently working in the same direction.

“Currently, there seems to be more than enough liquidity,” Logan said, pointing out that “there is still plenty of liquidity, not just sufficient. One sign is that money market interest rates generally continue to be far below the Federal Reserve Interest Rate.”

Logan said that recent fluctuations in the currency market are not surprising, nor should they bother the Federal Reserve. She pointed out, “I think it's important to tolerate this normal, moderate, and temporary pressure, so we can effectively reduce the size of our balance sheet.”

Logan said that in the long run, she expects the balance in the Federal Reserve's reverse repurchase tool to be negligible. She added that if some funds remain in the instrument in the future, “lowering (reverse repurchase) interest rates may return incentives to participants to return funds to the private equity market.”

She also said that in the long run, the money market interest rate should probably be close to or slightly higher than the reserve balance interest rate. She said the Federal Reserve sells mortgage bonds it holds to more quickly divest it from the balance sheet “in my opinion, this isn't a short-term thing.”

Logan also reiterated that “all banks” should develop plans to deal with the shortage of liquidity and be prepared to use the Federal Reserve's discounted window liquidity tool when necessary.