Source: Jin10 Data
Meister said that it is reasonable to gradually return the interest rate to a more normal level if the economic performance meets expectations.
As she is about to retire this month, Loretta Mester, President of the Cleveland Fed, still believes that the Fed needs to be open to actively selling mortgage-backed securities (MBS). Although such actions are not "urgent", Mester pointed out that the Fed's current goal is to return to a state of only holding US Treasury bonds, which means it may need to take active measures to sell MBS. These bonds were purchased to restore market functions and stimulate the economy after the outbreak of the COVID-19 pandemic. "I will be open to selling MBS," Mester said in an interview. "I don't think we should sell MBS immediately, but eventually we may want to sell these bonds" and need to explain to the public why this is happening, particularly considering that some of these bonds could be loss-making for the Fed. Mester discussed her views on the Fed's balance sheet outlook. Since June 2022, the Fed has been allowing a portion of its bonds to mature without replacement, reducing its holdings from a peak of $9 trillion to the current $7.3 trillion. Most of the reduction in the Fed's balance sheet is attributed to the natural maturity of the US Treasury bonds it holds. Due to the sluggishness of the housing market refinancing and home buying activities, MBS take longer to mature, making it more difficult for the Fed to reduce them. The Fed has made it clear that its goal is to only hold US Treasury bonds, but it may not be able to achieve this goal without actively selling them. During two rounds of quantitative tightening, the Fed never actively sold its bonds, and the market's reaction to this is still unclear. Mester's career at the Fed is coming to an end as she retires this month, after serving as President of the Cleveland Fed for the past ten years. Her departure comes against the backdrop of expexted cooling of US inflation over time, potentially allowing the Fed to cut interest rates. "If the economic performance meets expectations, "it's reasonable to gradually return rates to a more normal level, and I'd like to see more data over the next several months", she said. Before being confident in the need for loose policy implementation, she pointed out that monetary policy is in a good position to respond to potential economic performance.
Although such action is not "urgent", Mester pointed out that the current goal of the Federal Reserve is to return to the state of only holding US Treasury bonds, which means it may need to take proactive measures to sell mortgage-backed securities (MBS), which were purchased to restore market function and stimulate the economy after the outbreak of the COVID-19 pandemic.
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Mester leaves the Fed as she retires this month, after serving as President of the Cleveland Fed for the past ten years. Her departure comes against the backdrop of expexted cooling of US inflation over time, potentially allowing the Fed to cut interest rates. If the economic performance meets expectations, "it's reasonable to gradually return rates to a more normal level, and I'd like to see more data over the next several months", she said.
Most of the reduction in the Fed's balance sheet is attributed to the natural maturity of the US Treasury bonds it holds. Due to the sluggishness of the housing market refinancing and home buying activities, MBS take longer to mature, making it more difficult for the Fed to reduce them.
The Fed has made it clear that its goal is to only hold US Treasury bonds, but it may not be able to achieve this goal without actively selling them. During two rounds of quantitative tightening, the Fed never actively sold its bonds, and the market's reaction to this is still unclear.
Mester's career at the Fed is coming to an end as she retires this month, after serving as President of the Cleveland Fed for the past ten years. Her departure comes against the backdrop of expexted cooling of US inflation over time, potentially allowing the Fed to cut interest rates.
"If the economic performance meets expectations, "it's reasonable to gradually return rates to a more normal level, and I'd like to see more data over the next several months", she said. Before being confident in the need for loose policy implementation, she pointed out that monetary policy is in a good position to respond to potential economic performance.
Beth Hammack, Mester's successor, is a former top banker at Goldman Sachs with extensive market experience. Earlier this year, the St. Louis Fed also appointed a new leader with deep trading and investment experience, while Lorie Logan, current President of the Dallas Fed, played a core role in monetary policy implementation at the New York Fed prior to her appointment.
Mester did not participate in the process of selecting a new Fed President, but she believes that "different backgrounds are very important for the Fed".
Editor/Lambor