Cleveland Fed President Harmark stated that even in the context of unclear government fiscal prospects, the Federal Reserve should still steadily advance the balance sheet reduction (i.e., quantitative tightening or QT) process. She also made it clear that even if inflation pressures do not dissipate as quickly as expected, she is not inclined to support interest rate hikes.
Harmark pointed out in an exclusive interview with Reuters that during the period when the government clarifies spending plans and adjusts the debt ceiling to meet financing needs, 'the baseline expectation is that the Federal Reserve should continue to advance QT.' Once the government fiscal issues are resolved, if the distribution of market liquidity becomes imbalanced, 'liquidity can be injected into the system through temporary repurchase operations.'
This statement comes at a time when the outlook for QT is under intense discussion. The minutes from the Federal Open Market Committee (FOMC) meeting in late January, released last week, show that some officials are considering slowing down or pausing the QT process. Policymakers are concerned that under government fiscal operations, monitoring market liquidity has become more challenging. They are reluctant to excessively withdraw liquidity to avoid impacting the money market and losing effective control over the federal funds rate—this rate is the core policy tool the Federal Reserve uses to guide the economy.
Since the launch of QT in 2022, the Federal Reserve has reduced its balance sheet size from a peak of $9 trillion to $6.8 trillion by not renewing maturing U.S. Treasuries and mortgage-backed securities (MBS). However, the Federal Reserve has always maintained an open attitude regarding the duration of QT, emphasizing that adjustments will be made dynamically based on market data.
Harmark believes that once the debt ceiling issue is resolved, the Treasury's cash management may lead to a passive contraction of liquidity, but the Federal Reserve can hedge through repurchase tools. Regarding the QT process, 'I believe there is indeed room to continue progressing.' In the long term, she expects that the Federal Reserve will not actively sell MBS, even though its official goal is to focus the asset portfolio on U.S. Treasuries.
In her speech before the exclusive interview, Harmark emphasized that 'monetary policy has space to remain patient,' even in the face of a robust labor market and uneven inflation cooling. 'The federal funds rate may be maintained at the current level for a longer time.' She told Reuters that if inflation continues to stay above the 2% target, the probability of interest rate hikes, while not zero, is not her expected option.
In response to recent surveys showing a rise in public inflation expectations, Harmark admitted to closely monitoring the relevant data but emphasized that current long-term inflation expectations 'remain anchored.' Regarding the impact of the Trump administration's tariff policies on inflation, she believes it is too early to assess, and the final effect will depend on specific measures and reactions from other countries.
Article forwarded from: Jin Shi Data
