Federal Reserve Governor Christopher Waller expressed his opposition to the recent decision to slow the reduction of the central bank's securities holdings, citing that reserves in the banking system remain abundant.
Waller emphasized that reducing the Federal Reserve's balance sheet is crucial for normalizing monetary policy and eliminating excess reserves. He noted that while slowing or halting security redemptions may be appropriate as reserves approach an ample level, the current reserve balances of over $3 trillion are excessive.
He stated that there is no evidence from money market indicators or discussions indicating that the banking system is nearing an adequate level of reserves. Current data shows reserve balances at the Fed banks have remained stable at around $3.4 trillion.
During a recent two-day meeting, Fed policymakers decided to lower the monthly cap on the runoff of Treasuries from $25 billion to $5 billion, effective in April, while maintaining the mortgage-backed securities runoff cap at $35 billion. This decision was influenced by concerns regarding an impasse in Congress over lifting the government's borrowing limit, which could complicate the reduction of bank reserves and potentially disrupt the market when the debt limit is eventually raised. Fed Chair Jerome Powell stated that this slowdown would facilitate a smoother and more extended balance sheet reduction process, a view shared by most policymakers.
Waller suggested that, instead of slowing the balance sheet runoff, the Fed should devise a plan to address any short-term strains that may arise, highlighting the various tools available to the central bank for such situations.