Cleveland Fed President Beth Hammack stated on Wednesday that the current economic conditions allow for ongoing reductions in the Federal Reserve’s balance sheet. However, she emphasized that now is not the appropriate time to make preemptive changes to monetary policy. Instead, Hammack advocates for a patient approach, urging policymakers to assess incoming data before making any adjustments to interest rates. At a gathering organized by the Money Marketeers of New York University, Hammack elaborated on her perspective regarding the Fed’s balance sheet.
She believes there are still abundant reserves in the financial system, which diminishes the need for active management. Furthermore, she highlighted the risks associated with maintaining a large balance sheet, suggesting that it may dampen money market volatility while simultaneously encouraging risk-taking in financial markets. Hammack expressed that there may be instances where temporary market interventions by the Fed could be justified to manage short-term volatility. She indicated that the New York Fed could utilize its standard tools of open market operations if additional liquidity was required, even in a scenario with ample reserves.
In the previous month, the Fed opted to slow down the drawdown of its holdings in Treasury and mortgage bonds. Since 2022, the Fed has allowed bonds to mature without replacing them, and it has adjusted the pace of this contraction to ensure sufficient liquidity is maintained in the market. Hammack supported this more deliberate approach, interpreting it not as a signal of a permanent increase in the balance sheet size but rather as a way to sustain the process over a longer period. The ongoing quantitative tightening (QT) aims to reverse the substantial increase in Fed holdings, which swelled to $9 trillion during the COVID-19 pandemic.
Currently, the balance sheet stands at approximately $6.8 trillion. The Fed aims to ensure enough liquidity exists for normal market volatility while retaining control over short-term interest rates.