The Federal Reserve may need to buy more government bonds than it did before the 2008 financial crisis and conduct other money-market operations to implement its current approach to managing U.S. interest rates, a top central bank official said on Wednesday.
The Fed this year decided to indefinitely manage short-term interest rates by tweaking the interest it pays banks on excess money they keep at the central bank, a process that requires the central bank to keep a larger “balance sheet” and more bank reserves on hand than it did prior to the global financial crisis.
After that crisis, the Fed bulked up its holdings by buying Treasuries using bank reserves it created. In March, Fed officials decided to stop letting those reserves and its bond holdings decline. And to keep control of rates, officials will eventually have to start buying bonds again and building up bank reserves.
“The size of these purchases will need to be larger than similar pre-crisis operations,” in part because the Fed’s other liabilities – including paper currency and the U.S. government’s accounts – are bigger, Federal Reserve Bank of New York official Lorie Logan said in remarks prepared for delivery at an event in New York. The purchases would be "gradual and mechanical," she said.
Logan is head of Market Operations Monitoring and Analysis at the Federal Reserve Bank of New York, which implements the Fed’s monetary policies by trading in the market and managing the central bank’s portfolio.
She said bank reserves are currently ample enough to manage interest rates well currently.
(Reporting by Trevor Hunnicutt; editing by Diane Craft)