(Reuters) – The Federal Reserve’s nearly $9 trillion balance sheet has more room to decline than it did the last time the central bank shrank its holdings and policymakers will still watch money markets closely, a senior bank official said on Wednesday.
The Fed’s standing repo facilities should also serve as a backstop to keep markets stable as the central bank shrinks its bond holdings, said Lorie Logan, an executive vice president with the New York Fed.
“Staff will carefully monitor developments in money markets to understand changes in reserve conditions,” Logan said during a webinar organized by New York University.
Logan reiterated that policymakers want to shrink holdings mainly by letting their securities mature.
Some officials have said the Fed may need to consider selling some if its mortgage-backed securities later to speed up the transition to a portfolio made up mostly of Treasury securities, but Logan said those decisions would be made later.
She also shared some estimates on what the balance sheet runoff could look like. For instance, principal payments from Treasury holdings could range from $40 billion to $150 billion per month, over the next few years, averaging around $80 billion.
The runoff for mortgage-backed securities could average about $25 billion per month over the next few years, but the exact pace is uncertain and affected by mortgage rates, she said.
The Fed’s balance sheet doubled after the central bank purchased assets to stabilize markets and support the economy during the pandemic. Logan, who heads the New York Fed’s market operations, said that asset purchases to support market functioning will be rare in the future.
“I expect circumstances warranting sizable intervention to support market functioning to be extraordinarily rare,” she said.
(Reporting by Jonnelle Marte; Editing by Sam Holmes)