Jan 8, 2024 - Economy

The end of the Fed's crisis-era stimulus is near

Dallas Fed President Lorie Logan

Photo: Nitashia Johnson/Bloomberg via Getty Images

A new speech from the head of the Federal Reserve Bank of Dallas offers hints of when the Fed might be done with "quantitative tightening."

Why it matters: The Fed has shrunk its securities holdings by $1.3 trillion and counting, essentially draining that amount from the financial system at a clip of $95 billion a month, in order to reverse its crisis-era quantitative easing. That has contributed to a bumpy couple of years for asset prices.

  • If the Fed soon decides to wind down those policies, it would reduce that stress.

What they're saying: "In my view, we should slow the pace of runoff" of the Fed's securities holdings as usage of the "overnight reverse repo facility" — which provides short-term liquidity to the marketplace — approaches a low level, said Dallas Fed president Lorie Logan at the American Economic Association.

  • Uptake of the reverse repo facility, as it is known, has declined rapidly from $2.4 trillion a year ago to $900 billion last week.
  • "Normalizing the balance sheet more slowly can actually help get to a more efficient balance sheet in the long run by smoothing redistribution and reducing the likelihood that we'd have to stop prematurely."

Of note: Logan's comments on the Fed's balance sheet strategy carry extra weight. She was formerly head of the New York Fed's markets desk — carrying out the quantitative easing program that is now being reversed.

What's next: The question now is when Logan and her colleagues on the Federal Open Market Committee will judge that this threshold has been met.

  • Bank of America economists now predict the central bank will begin tapering the QT program at their March meeting before ending it this summer. The Fed-watchers at Evercore ISI put it later, with the taper starting this summer and QT ending near year-end.
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