(Reuters) – Federal Reserve Governor Michelle Bowman on Tuesday said she would have supported either waiting to start slowing the run-off in the U.S. central bank’s balance sheet or a more moderate tapering process than announced earlier this month.
Bowman, in remarks prepared for delivery to a Bank of Japan conference in Tokyo, said she believes commercial bank reserve levels at the Fed remain abundant, giving officials more time to proceed with the $95 billion-a-month run-off target that has been in place since mid-2022.
“While it is important to slow the pace of balance sheet runoff as reserves approach ample levels, in my view we are not yet at that point,” she said, especially with still-sizable take-up at the Fed’s overnight reverse repo facility, or ON-RRP.
The level of reserves that banks hold at the Fed is a key consideration for determining the overall size of the central bank balance sheet, which has shrunk from around $9 trillion in 2022 to about $7.4 trillion now through a process commonly known as quantitative tightening. Officials do not want to see a repeat of what occurred in September 2019, when they reduced the balance sheet too much and triggered a bout of volatility in short-term funding markets.
On May 1, the Fed announced it would start slowing the pace of reduction of its balance sheet. At present, the Fed is allowing up to $60 billion a month of Treasuries and $35 billion of mortgage-backed securities to mature from its bond portfolio without being replaced. Under the plan due to begin next month, the cap for Treasuries would drop to $25 billion, while the MBS maturity limit would remain as is.
Minutes released last week of the April 30-May 1 meeting at which the decision was reached showed not all Fed officials favored making that shift now, and Bowman’s remarks indicate she was among the “few participants” who would have preferred to wait.
“In my view, it is important to continue to reduce the size of the balance sheet to reach ample reserves as soon as possible and while the economy is still strong,” Bowman said. “Doing so will allow the Federal Reserve to more effectively and credibly use its balance sheet to respond to future economic and financial shocks.”
Bowman also said it is important that Fed officials communicate effectively that any change in the balance sheet run-off does not reflect a change in monetary policy, including interest rates.
The Fed has held its benchmark interest rate in a range of 5.25% to 5.50% since last July, and officials recently have indicated they are in no rush to begin rate cuts because inflation has proven stickier than they had estimated.
On other balance sheet considerations for the longer term, Bowman said she favors a portfolio composed primarily of Treasuries and one that is “tilted slightly” toward shorter-dated maturities, which would offer the Fed more flexibility.
(Reporting by Dan Burns; editing by Jonathan Oatis)
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