Financial Association News on October 21 (Editor: Niu Zhanlin) On Monday Eastern Time, Dallas Federal Reserve Bank President Logan said that due to various uncertainties in the economic environment, the Federal Reserve should be cautious in cutting interest rates, and she supports a 'gradual' rate cut.

Before the Securities Industry and Financial Markets Association (SIFMA) annual meeting in the U.S. on the same day, Logan made a speech stating that as the Federal Reserve gradually lowers interest rates, the inflation rate in the USA may fall to the Fed's target of 2%, and the labor market will not cool too quickly.

She stated: 'If the economy develops as I currently expect, then gradually lowering the policy rate to a more normal or neutral level can help manage risks and achieve our goals. However, there may be many unforeseen shocks (such as economic, political, market events) affecting this process, which may change the path, speed, and eventual level of rate adjustments.'

Last month, the Federal Reserve cut interest rates by 50 basis points more than expected to prevent the labor market from cooling too quickly. However, since then, the data on the U.S. employment market has been much stronger than expected, with faster monthly job growth rates and a decrease in the unemployment rate to 4.1%. Therefore, the financial markets currently expect the Fed to cut rates by 25 basis points next month.

Logan pointed out that the Federal Open Market Committee (FOMC) will need to maintain flexibility and make adjustments when necessary. Most of Logan's career has been spent in the market department of the New York Fed, where she managed the Fed's system open market accounts. In this speech, she also discussed the dynamics of the Fed's balance sheet and funding markets.

Logan stated that currently the liquidity in the market is still 'very abundant', so there is no need to stop balance sheet reduction quickly. Although the usage of the Federal Reserve's overnight reverse repurchase (ON RRP) tools has been decreasing over the past two years, the current balance is still far higher than pre-pandemic levels, providing some cushion for the financial system.

However, she also pointed out that in the long run, the balance of overnight reverse repurchase agreements should be reduced to a negligible level, indicating that the Fed expects future market liquidity to decrease, closer to the pre-pandemic situation.

Logan also added that although there has been some pressure in the money market recently, she believes that these pressures are temporary and, in order to achieve the long-term goal of monetary policy, which is to achieve a 'neutral' balance sheet size that neither stimulates nor restricts the economy, these small market pressures can be tolerated in the short term.

Federal Reserve officials have been reducing the size of the balance sheet. During the COVID-19 pandemic, in order to lower market rates and support economic development, the Fed bought a large amount of US Treasuries and Mortgage-Backed Securities (MBS), leading to an increase in the balance sheet size to nearly $9 trillion. This year, the Fed has already slowed down the pace of shrinking the balance sheet.

The Fed's balance sheet reduction process has been going on for over two years, shrinking its total balance sheet size from the peak of $9 trillion to the current level of $7.1 trillion. Post-pandemic, the Fed is seeking to withdraw unnecessary liquidity as part of normalizing monetary policy.

Logan also emphasizes that all banks should develop robust contingency liquidity plans to address liquidity shortages that the private market cannot meet, and every bank in the USA should be prepared to use the discount window operation.

Editor/Somer