Waller says Fed's mortgage holdings should dwindle

Bloomberg/Photographer: Bloomberg/Bloomber

Federal Reserve Governor Christopher Waller said he'd like to see the central bank's holdings of mortgage-backed securities go to zero. 

Waller is among more than a half-dozen Fed officials set to speak Friday in speeches or broadcast interviews. Others include Dallas Fed President Lorie Logan and Chicago Fed President Austan Goolsbee.

In recent weeks, many policymakers have indicated that interest rates will remain at a 22-year high at least through the Fed's next meeting on March 19-20, with the first cut likely later this year. Officials are watching to see whether January's surprise jump in consumer prices was a fluke or a roadblock on the way toward lower inflation.

Fed Chair Jerome Powell will give the view from the top next week in two days of semiannual congressional testimony on monetary policy.

Fed Governor Christopher Waller said he'd like to see the central bank's holdings of mortgage-backed securities go to zero. "It is important to see a continued reduction in these holdings," Waller said Friday in prepared remarks at a conference in New York.

He also said he'd like a shift in the Fed's holdings toward a larger share of short-term Treasuries. Prior to the financial crisis, about one third of the Fed's Treasury securities holdings were bills, Waller said. Today, these short-term securities comprise less than 5% of their Treasury holdings and 3% of their total securities holdings.

Waller is on a panel discussing quantitative tightening — the Fed's process of shrinking its asset portfolio — at the U.S. Monetary Policy Forum hosted by the University of Chicago Booth School of Business. He said it's important for any quantitative easing program to be followed by credible quantitative tightening to avoid inflation arising from a permanent injection of reserves into the banking system.

Logan says Fed must 'feel our way' to right level of reserves

Dallas Fed President Lorie Logan reiterated that it'll likely be appropriate for the central bank to start slowing the pace at which it shrinks its balance sheet as the overnight reverse repo facility drains.

The Fed will need to approach decisions around the balance sheet carefully, since it's not clear what level of reserves is enough to meet banks' liquidity needs, she said Friday in prepared remarks at the U.S. Monetary Policy Forum.

"We'll need to feel our way to it by observing money market spreads and volatility," she said. "To me, the need to feel our way means that when ON RRP balances approach a low level, it will be appropriate to slow the pace of asset runoff. But once the ON RRP is empty, there will be more uncertainty about how much excess liquidity remains."

She also repeated that slowing the pace of QT doesn't mean the Fed will stop letting maturing assets roll off altogether. The slower pace could allow the the run off to continue for longer, and will also mitigate the risk of liquidity stress.

Global central banks shrink with little impact, study says

Global central banks are shrinking their balance sheets down from massive pandemic stimulus with little impact on bond or money markets, a paper prepared for the U.S. Monetary Policy Forum said.

The effects of quantitative tightening or "QT" have been "very small (or non-existent) on average, statistically insignificant to date, and much less than the impact" of the emergency bond buying known as quantitative easing, wrote Wenxin Du of Columbia Business School, Kristin Forbes of MIT's Sloan School of Management and Deutsche Bank's chief US economist Matthew Luzzetti. 

The paper studied balance sheet reductions at seven central banks ranging from the Fed to the European Central bank and the Reserve Bank of Australia.

Barkin says there's no battle with markets

Richmond Fed President Thomas Barkin said markets are pricing in fewer interest-rate reductions this year in response to economic data, not because the central bank is winning a battle with investors.

"Lord knows, I'm not spending any time trying to have swagger against the market," Barkin said in a CNBC interview. Economic data has "come in more consistent with our forecast and therefore the markets have adjusted. And I think if the data comes in different then we'd adjust."

Barkin said he didn't take much signal from a report Thursday showing the Fed's preferred gauge of underlying inflation rose in January at the fastest pace in nearly a year, noting January figures are volatile and affected by seasonality.

The Richmond chief said he was hopeful inflation's going to come down and "then it makes the case for why you'd want to start normalizing rates."

Apollo's Slok says Fed won't cut rates in 2024

Apollo Management Chief Economist Torsten Slok said that a re-accelerating U.S. economy, coupled with a rise in underlying inflation, will prevent the Fed from cutting interest rates in 2024. 

"The bottom line is that the Fed will spend most of 2024 fighting inflation," Slok wrote in a Friday note to clients. "As a result, yield levels in fixed income will stay high."