Federal Reserve Bank of Dallas President Lorie Logan said on Monday that she sees more interest rate cuts in the future for the central bank and suggested that there is no reason why the Federal Reserve cannot continue to shrink its balance sheet.
"If the economy develops as I now expect, a strategy of gradually reducing policy rates to a more normal or neutral level could help manage risk and achieve our goals," Logan said.
"The economy is strong and stable," but, "significant uncertainty remains in the outlook" for increased risks to the job market and continued risks to the Fed's inflation objective. The Federal Reserve "needs to remain nimble and ready to adapt if necessary," he said.
Logan spoke as market participants were now debating whether the Federal Reserve could implement a half-percentage-point rate cut until the end of the year as planned at its September policy meeting. Although inflation has eased, the latest jobs data suggests a stronger-than-expected labor sector, which for some suggests the Fed may not need to be too aggressive in cutting rates.
Logan focused much of his speech on the ongoing process of reducing the Fed's balance sheet, known as quantitative tightening. Since 2022, the Fed has been selling mortgage and Treasury bonds it bought to provide stimulus and propel markets during the onset of the pandemic. It has reduced holdings from a peak of $9 trillion to a current mark of $7.1 trillion, and Fed officials suggest this process may still continue.
Logan indicated that he did not see the need to stop these measures in the near future and noted that quantitative tightening and interest rate reductions represent the normalization of monetary policy and are now moving in the same direction.
He added that, in the long term, the money market rate should be close to or slightly above the interest rate on savings balances. He also said the Fed's sale of mortgage bonds to accelerate withdrawals from the balance sheet "is not a short-term issue in my view."
Logan also reiterated that "all banks" need to have plans to meet liquidity shortages and be prepared to use the Fed Discount liquidity facility if needed.
