Steno Signals #81 – Fed member promises that QT is effectively already over
Happy Sunday and welcome to our weekly flagship editorial.
Quote of the week:
“So, given the rapid decline of the ON RRP, I think it’s appropriate to consider the parameters that will guide a decision to slow the runoff of our assets. In my view, we should slow the pace of runoff as ON RRP balances approach a low level.”
– Lorie Logan, FOMC member at the annual meetings of the International Banking, Economics and Finance Association and the American Economic Association.
The above quote was delivered on Friday in a speech by Dallas Fed president Lorie Logan and it may prove to be the most important quote by a central banker in 2024 so far. Effectively, the quote is a promise that QT is already history as the impact of Fed policy on liquidity / bank reserves will remain neutral to slightly positive from here, which is essentially what we have told clients for a while now.
This is a substantial move in a dovish direction on the balance sheet policy as the Fed abandoned the “Waller-rule”, which has guided the balance sheet communication- and policy until now. Find out what it means below!
Chart 1: The Waller rule is no more
The Fed has abandoned the strategy of bringing bank reserves (substantially) down, which effectively means that QT is over. This happens amidst rising freight rates. Rising liquidity and inflation?