Fed's Hammack sees more runway for Fed balance sheet cuts

Economic Times

24-04-2025

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Conditions still support ongoing reductions in the Federal Reserve's balance sheet, Cleveland Fed President Beth Hammack said on Wednesday, as she also noted that amid great uncertainty now is not the time to change monetary policy."This is not a good time to be preemptive" with monetary policy, she said, adding that now is a time to be patient and see how the data come in before acting on interest rates.Hammack, at a meeting of the Money Marketeers of New York University, spoke at length on her views on the Fed's balance sheet."We still appear to have more than enough reserves in the system so that active management isn't needed," Hammack said.With more room to run on shrinking Fed holdings - the process widely referred to as quantitative tightening , or QT - Hammack said there are risks for financial stability in keeping Fed holdings too large."To the extent that a large balance sheet with more-than-ample reserves dampens money market volatility , it also promotes risk-taking in financial markets," she said.Hammack said that over time, temporary market interventions by the Fed to manage short-term swings in volatility could be warranted."There may be scenarios in which the Federal Reserve would need to add temporary liquidity," she said. "In that case," she said, "nothing would prevent" the New York Fed "from using its standard tools of open market operations to maintain the fed funds target range even if reserves were ample."The Fed last month decided to substantially slow the ongoing drawdown of its holdings of Treasury and mortgage bonds. Since 2022 the Fed has been allowing bonds it owns to mature and not be replaced. It has twice slowed the pace of that contraction to better allow policymakers to ensure they are not pulling out liquidity too swiftly.Hammack said she supported the slower drawdowns. While there were still enough reserves in the system to press forward, "I expect that by slowing the pace of runoff, we will be able to let the process continue for longer," she said."I interpret this slower pace to emphatically not be a signal of a permanently larger balance sheet than would have been the case without a slowdown."Via QT, the Fed has been withdrawing money it added during the COVID-19 pandemic and its aftermath. Bond purchases aimed at stabilizing markets and providing stimulus more than doubled the size of Fed holdings to $9 trillion. The contraction process has brought the balance sheet down to $6.8 trillion.It is unclear how far the Fed will be able to shrink its holdings, as it works toward a landscape where there is enough liquidity to allow for normal market volatility and for the Fed to retain firm control over its short-term interest rate target.Fed officials believe the newly reduced pace of drawdown will allow QT to reach its natural endpoint without creating market disruptions.Comments from Hammack ahead of the Fed's March policy meeting suggest she would have preferred another path for the balance sheet. In a February Reuters interview, she noted her desire for a steady QT pace and the use of repo operations to deal with any liquidity needs the market might have around market volatility tied to government efforts to manage its cash.Focus on the Fed balance sheet has been renewed amid high levels of market volatility tied to the twists and turns of President Donald Trump's tariff regime. Stress has been such that some have wondered if the Fed might have to intervene with market-stabilizing bond purchases if trading became truly disordered.Hammack said that markets have appeared orderly amid the high levels of volatility, with investors being able to reposition money. Echoing recent comments from Fed Chairman Jerome Powell, Hammack said, "I think there has to be incredibly high bar for the Fed to step in and say things aren't working. We need to be there" to support markets.