Federal Reserve Bank of Dallas President Lorie Logan repeated her call for the U.S. central bank to lower interest rates at a careful pace as the economic environment remains uncertain.
Logan, speaking Monday in prepared remarks for the Securities Industry and Financial Markets Association's annual meeting in New York, said less restrictive monetary policy will help the Fed balance risks to both the inflation and labor market sides of its dual mandate.
"If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals," Logan said. "However, any number of shocks could influence what that path to normal will look like, how fast policy should move and where rates should settle."
RELATED:
Policymakers began lowering interest rates for the first time since the onset of the pandemic at their meeting last month. They cut by a half percentage point, to a range of 4.75% to 5%, as concern mounted that the labor market was deteriorating and as inflation cooled close to the Fed's 2% goal.
Economic data since then has shown that hiring over the past three months was stronger than initially expected, and market participants now anticipate a smaller, quarter-point cut at the Fed's Nov. 6-7 meeting.
"The FOMC will need to remain nimble and willing to adjust if appropriate," Logan said.
During a Q&A following her speech, she said businesses in the Dallas Fed district, which encompasses southern New Mexico, northern Louisiana and all of Texas, say they are optimistic and see solid growth over the next six months, but also a lot of uncertainties.
Logan, who spent the bulk of her career in the New York Fed's markets group, ultimately managing the Fed's System Open Market Account, also spoke about the central bank's balance sheet and funding market dynamics.
"They'll be taking time to make sure they understand those risks as they plan for future investment," Logan said in a question-and-answer session following her speech.
Balance Sheet
Logan said liquidity in the market remains "more than ample." While use of the Fed's overnight reverse repurchase facility has been declining over the past two years, the current balance remains well above the pre-pandemic level.
"For now, the remaining ON RRP balances provide a buffer of additional excess liquidity," Logan said, adding that in the long run, ON RRP balances should be negligible.
If balances in the facility don't decline as repo rates rise closer to the interest rate on reserve balances, it may be appropriate to reduce the ON RRP's interest rate, she said. Logan also added that recent pressures in money markets appear to be temporary and that policymakers should tolerate such small pressures in order to reach an efficient balance sheet size.
Officials have been reducing the size of the balance sheet, which grew to nearly $9 trillion during the pandemic as the Fed bought Treasuries and mortgage-backed securities to lower market rates and support the economy. It has slowed the pace of that runoff this year.
Logan noted that mortgage-backed securities remain a substantial part of the balance sheet and are projected to remain so for years to come, though the Fed intends to ultimately hold mostly Treasuries.
The Dallas Fed chief repeated a call for all banks to be signed up for and ready to use the Fed's emergency liquidity tool, the discount window, should they need to do so. She also suggested the Federal Open Market Committee might at some point consider central clearing for its Standing Repo Facility, as the Securities and Exchange Commission has done for the broader Treasury market.
"The risk-management improvements that will come from central clearing are significant," Logan said. "Better transparency, and perhaps enhanced intermediation, that come from central clearing will further support the market, not so much in just normal times, but important in periods of stress."
