By Ann Saphir
(Reuters) -Dallas Federal Reserve President Lorie Logan on Monday said she feels the U.S. central bank has more room to reduce its reserves, and she expects banks to turn to its standing repo facility next month to alleviate any liquidity pressures.
“We could see some temporary pressure around the tax date and quarter-end in September,” Logan said in remarks prepared for delivery to the Bank of Mexico’s centennial conference in Mexico City. “I was encouraged to see market participants using the SRF over the June quarter-end, and I anticipate they will similarly use our ceiling tools if necessary in September.”
The facility, aimed at preventing liquidity shortages, allows Treasuries owned by eligible firms to be converted quickly into cash, and should lessen the need for the Fed to step in on an emergency basis. It generally sits unused, though there has been some use when banking reserves drop, notably at the end of September in 2004.
As reserves in the banking system drop, Logan said, it is preferable for the Fed and other central banks to avoid balance sheet expansion in response to higher short-term demand for reserves from banks, or risk an “ever-expanding” balance sheet.
The Fed also offers banks liquidity through its discount-window loans. Logan on Monday said the central bank should consider increasing or removing limits on the size of the facility, or centrally clearing those transactions, and she repeated an earlier proposal for the Fed to offer a daily auction on discount window loans to allow easier distribution of liquidity within the banking system.
Logan did not address the outlook for monetary policy or the economy, an omission that may draw notice from investors who have been watching to see how the Fed’s more hawkish policymakers, Logan among them, view the risks around inflation, which remains above the central bank’s 2% goal, and the labor market, which has shown recent signs of weakness including a sharp drop-off in monthly payroll gains.
Fed Chair Jerome Powell said on Friday he felt downside risks to the labor market had risen, a development that “may warrant adjusting” the central bank’s currently restrictive monetary policy stance. Financial markets took the remarks as a go signal for an interest rate cut at the Fed’s September 16-17 meeting, as did many on Wall Street.
(Reporting by Ann Saphir; Editing by Paul Simao)
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