By Michael S. Derby
NEW YORK (Reuters) -New York Federal Reserve President John Williams reiterated on Wednesday the time is getting closer when the U.S. central bank will have to restart bond purchases
as part of a technical effort to maintain control over short-term interest rates.
Williams, in the text of a speech to be delivered to a conference at his regional Fed bank, noted that when these purchases happen they have no implications for monetary policy. He did not comment on the outlook for short-term interest rates in his prepared remarks.
Instead, the New York Fed chief tackled the implications of the central bank's decision late last month to stop the drawdown of its balance sheet at the start of December. Williams said the Fed, by way of "inexact science," is looking for the level of reserves it considers to be "ample," which allows for firm control of the central bank's interest rate targets as well as normal money market trading conditions.
"The next step in our balance sheet strategy will be to assess when the level of reserves has reached ample," Williams said. "It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves as the Fed's other liabilities grow and underlying demand for reserves increases over time."
Williams' comment on the Fed's balance sheet followed a choppy period for short-term funding markets around the time of the October 28-29 policy meeting.
The Fed cut its benchmark interest rate by a quarter of a percentage point to the 3.75%-4.00% range at that meeting to help bolster a weakening job market even as inflation remains stubbornly above the 2% target.
The central bank also announced plans to stop shrinking the size of its balance sheet at the start of December, ending what had been called quantitative tightening, or QT, due to rising volatility in money markets.
QT had been allowing Treasury and mortgage bonds owned by the Fed to run off and not be replaced, in a bid to remove the sea of liquidity that was added during the COVID-19 pandemic. That effort took the Fed's balance sheet from its overall $9 trillion peak in 2022 to the current overall level of about $6.6 trillion.
USE OF STANDING REPO FACILITY ENCOURAGED IF NEEDED
In a speech last week, Williams flagged the looming need to soon commence gradual outright purchases of bonds to maintain a balance between market liquidity and a growing economy.
Williams also said in his prepared remarks on Wednesday that a new tool called the Standing Repo Facility, or SRF, which provides fast cash to eligible banks, has been working well as a source of liquidity for those who need it, and he encouraged banks to tap it without worrying that borrowing from the Fed signals a problem.
The SRF's "effectiveness relies on market participants availing themselves of the SRF based on market conditions, free of worries about stigma or other impediments," Williams said, adding "I fully expect that the SRF will continue to be actively used in this way."
(Reporting by Michael S. Derby; Editing by Paul Simao)
