In a recent speech delivered to the Securities Industry and Financial Markets Association, Lorie Logan, President of the Dallas Federal Reserve Bank, shared her insights on the Federal Reserve’s future monetary policy, indicating that further interest rate cuts are expected. She emphasized that there is no reason for the Fed to refrain from continuing to reduce its balance sheet.
Logan stated, “If the economy develops in line with my current expectations, a strategy of gradually lowering policy rates to more normal or neutral levels could help manage risks and achieve our objectives.” While she acknowledged the economy’s strength and stability, she also pointed out the rising risks in the labor market and persistent challenges to the Fed’s inflation targets, suggesting that significant uncertainty still looms.
A considerable portion of Logan’s remarks focused on the Fed’s ongoing balance sheet reduction process, known as quantitative tightening (QT). Since 2022, the Fed has been unwinding its portfolio of mortgage-backed securities and Treasury bonds that were acquired to provide relief and stabilize markets during the COVID-19 pandemic. The Fed has decreased its holdings from a peak of $9 trillion to approximately $7.1 trillion, with officials noting that there is still room to advance this process further.
Logan expressed her belief that there is no immediate need to halt these efforts, highlighting that both quantitative easing and interest rate cuts reflect the normalization of monetary policy. She pointed out, “Currently, liquidity appears to be quite ample,” and added, “Signs indicate that the supply of liquidity remains plentiful, not just sufficient, as money market rates continue to be significantly lower than the Fed’s reserve balance rate.”
