“I hope it won’t take long until we reach sufficient reserves,” Williams stated at a monetary market conference in Frankfurt organized by the European Central Bank (ECB).
The president of the Federal Reserve Bank of New York made these remarks a week after the Fed’s chairman, Jerome Powell, announced that the institution’s balance sheet reduction would conclude on December 1, following liquidity tensions in the dollar money market.
Williams noted that the Fed may need to purchase bonds and consider shortening the average duration of its debt holdings.
“The next step in our balance sheet strategy will be to assess when the level of reserves reaches a sufficient amount,” added Williams.
“Then it will be time to start the gradual asset purchase process, which will maintain a broad level of reserves,” opined the New York Fed president.
Williams remarked that this reserve management will not represent a shift in the Fed’s monetary policy stance.
Currently, according to Williams, the process of reducing the Fed’s balance sheet, which began in June 2022, has proceeded as planned.
Previously, like other central banks worldwide, the Fed increased reserves during the pandemic to a “well above ample” level to restore market functioning, Williams noted in Frankfurt.
In June 2022, the Fed started the process of reducing its balance sheet to a “broad level of reserves.”
The process worked as expected.
“The Fed’s securities holdings declined from a peak of $8.5 trillion in 2022 to $6.25 trillion today,” Williams stated.
The Fed controls the level of its interest rates and other short-term rates through its reserves, Williams added during the conference speech.
Hence, the Fed calculates in advance a reserve supply that will be sufficiently broad “to cover the demand for reserves on most days,” according to Williams.
Similarly, Williams considered that the recent volatility in repo markets (agreements to repurchase debt at a predetermined price) shows that reserves have dropped to levels that necessitate the Fed to soon purchase a modest level of securities to supply overnight loan markets at adequate levels.
