Fed’s Barr: Easing liquidity regulations to reduce Fed balance sheet not advisable
Federal Reserve (Fed) Governor Michael Barr said that lowering liquidity rules to get the central bank’s balance sheet smaller is a bad idea and could undermine the safety of the financial system, Reuters reported on Thursday.
Key quotes
Easing liquidity regulations to reduce Fed balance sheet not advisable.
Reducing liquidity requirements would just heighten stability risks.
Reduced balance sheet may boost funds to Fed liquidity facilities.
Reduced Fed balance sheet would probably boost Fed interventions.
Fed working to shift balance sheet duration to align with broader Treasury market.
Doubtful liquidity coverage ratio adjustment will significantly impact reserve demand.
Monetary policy toolkit has been effective for a long time.
Effective monetary policy execution revolves around rate management.
Generating reserves doesn't cost the Fed.
Liquidity requirement should increase, not decrease.
Returning to limited reserves would involve significant trade-offs.
Market reaction
At the time of writing, the US Dollar Index (DXY) is trading around 98.95, up 0.07% on the day.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
