### Dallas Fed President Lorie Logan Outlines Path to Monetary Policy Normalization

Dallas Fed President Lorie K. Logan delivered a crucial speech at the Securities Industry and Financial Markets Association (SIFMA) annual meeting, focusing on the Federal Reserve's approach to money markets and balance sheet adjustments. This context is considerably different from her previous remarks at the 2021 SIFMA event when she addressed pandemic-related economic supports.

The Federal Open Market Committee (FOMC) maintained an effective lower bound for the federal funds target range from March 2020 to March 2022 to buttress the pandemic-stricken economy. However, facing resurgent inflation, the FOMC aggressively raised the target range through 2022 and 2023. This past month, the range was lowered, given that both inflation and employment had neared the FOMC's targets. Logan emphasized that less restrictive policies could prevent unnecessary cooling of the labor market while still ensuring a return to target inflation.

Reflecting on the current economic landscape, Logan observed, “The economy is strong and stable. But second, meaningful uncertainties remain in the outlook." While labor market downside risks have escalated, inflation risks persist, albeit in a diminished form.

Initiating a gradual reduction in the policy rate toward a neutral level is seen as a strategy to manage these risks and achieve FOMC's dual-mandate goals of maximum employment and stable prices. Alongside adjustments to the target range, the Fed continues the process started in 2022 of normalizing its balance sheet by allowing longer-term assets to mature.

Logan elaborated on potential concerns about conflicting strategies of reducing both the policy restriction through lower fed funds rates and asset holdings. She clarified that these processes are congruent: normalizing the fed funds rate involves reducing them from elevated levels necessary for past price stability, while balance sheet normalization decreases asset holdings from pandemic levels, contributing to efficient and effective monetary policy.

Currently, reserve balances stand at $3.2 trillion, a sharp increase from the $1.7 trillion recorded in early 2020. Logan suggests that although the banking sector's liquidity demand rose significantly during recent banking stresses, it likely hasn’t doubled. Indicators like the tri-party general collateral rate (TGCR) on Treasury-secured repos and substantial balances in the Fed's overnight reverse repo (ON RRP) facility further illustrate the abundant liquidity.

Interestingly, liquidity fluctuations on key dates such as quarter-ends have appeared as temporary frictions rather than aggregate supply shortfalls. For instance, on September 30 and October 1, the spread between SOFR and TGCR widened due to dealer balance sheet limitations.

Considering recent changes in market dynamics and the Federal Reserve's ample reserves policy regime, Logan believes the Fed should strive for money market rates close to, but slightly below the Interest on Reserve Balances (IORB). Additionally, operational readiness for banks, including accessing the discount window, remains crucial.

Logan concluded by stressing the importance of keeping the discount window and other liquidity-providing tools like the Standing Repo Facility effective in light of ongoing ample reserve conditions. The FOMC also explores the benefits of central clearing for open market operations to enhance transparency and reduce intermediaries' costs.

As Logan aptly summarized, the journey toward an efficient balance sheet size and effective monetary policy demands adaptive and thoughtful strategies. Her detailed examination of the current and future steps in this normalization process provides a comprehensive blueprint for navigating economic uncertainties.