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The individual overseeing the Federal Reserve’s large portfolio of cash and bonds stated on Thursday that there is still plenty of flexibility in reducing the Central bank‘s balance sheet. Roberto Perli, the manager of the Fed’s System Open Market Account, indicated that current pressures in the repo market are not yet at a level where they would impact the federal funds rate, allowing for further reduction of the Fed’s holdings, which currently stand at approximately $7.2 trillion.
In the past two years, the Fed has been gradually reducing its holdings by allowing some bonds to mature without replacement. This strategy aims to normalize market liquidity and maintain Central bank control over short-term Interest rates. While the exact extent of the balance sheet reduction remains uncertain, Fed officials are monitoring market conditions for any signs of tightening liquidity. Despite recent rate cuts, Fed Chair Jerome Powell announced the intention to continue with the drawdown of the balance sheet.
Perli noted that repo market rates have been increasing, but this may not necessarily indicate tightening liquidity. Challenges in the repo market are attributed to market frictions hindering the redistribution of liquidity, particularly due to increased concentration which limits trading among firms. The New York Fed’s reverse repo facility has seen significant remaining balances, indicating these market frictions, even when private sector investments offer better rates.
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Emma Collins, graduated in Financial Economics from the University of Chicago in the USA in 2016. She has since worked at an asset management firm in New York, where she specializes in investment strategies and portfolio management. Emma has a keen interest in financial analysis and has published several articles in renowned financial journals. Her work focuses on providing actionable insights to investors, and she is known for her forward-thinking approach to managing financial portfolios.
