By Michael S. Derby
JERSEY CITY, New Jersey, June 24 (Reuters) – A Federal Reserve Bank of New York official involved in implementing monetary policy cautioned on Wednesday against reading too much into language in last week’s Federal Open Market Committee meeting that addressed how the central bank manages its expansive balance sheet.
The document, released on June 17 when the FOMC met for the first time under new Chairman Kevin Warsh, noted: “The Committee reaffirmed its policy of maintaining ample reserves in the banking system.” Warsh has been a deep skeptic of Fed asset-buying policies.
Some analysts interpreted that addition as a signal that the Warsh-led Fed was offering a new sympathetic take on how the central bank has been managing liquidity. Over the course of this year, the Fed has been buying Treasury bills to ensure that money markets have enough cash to keep the Fed’s short-term rate target at the desired level.
Speaking at Crane’s Money Fund Symposium in Jersey City, New Jersey, Dina Marchioni, director of money markets for the New York Fed, said of the FOMC statement: “I didn’t interpret it as having really a big change in what the direction was to the Desk.”
Regarding the new wording, Marchioni added, “You could say this is clean-up language,” and officials still have “lots of flexibility” to tweak the pace of Treasury bill buying to deal with market liquidity conditions. New York Fed officials have already said the pace of so-called “reserve management buying” would react to market liquidity conditions.
The Fed has been buying notable amounts of Treasury bills since last December as part of a technical exercise to manage market liquidity. That has caused the size of the Fed’s balance sheet to rise, moving from $6.5 trillion in December to its current level of $6.7 trillion.
The Fed has moderated the pace of the buying from $40 billion per month to the current rate of $10 billion per month, amid questions about the future of the effort. Warsh is a skeptic of using the Fed’s balance sheet as a policy tool and has launched an effort to consider the future of the program.
Warsh wants the Fed to have a smaller balance sheet and believes that asset purchases that were aimed at calming markets and augmenting changes in interest rate policy have left the Fed holding too many bonds.
(Reporting by Michael S. Derby; Editing by Edmund Klamann)
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