Federal Reserve Governor Waller explains his sole dissenting vote at the March meeting: U.S. bank reserves are above ample levels

On Friday, Federal Reserve Governor Christopher Waller stated that the Federal Reserve should maintain the current reduction limit for U.S. Treasury securities, as bank reserves in the U.S. are above ample levels. Federal Reserve policymakers agreed to reduce the Fed's balance sheet at a slower pace during this week's March FOMC meeting. Starting in April, the Fed will lower the monthly cap on the reinvestment of maturing U.S. Treasury securities from $25 billion to $5 billion. Officials will keep the cap on the reduction of mortgage-backed securities unchanged at $35 billion. Waller opposed the aforementioned decision, preferring to maintain the $25 billion monthly reduction pace for U.S. Treasury securities. He agreed with other Fed officials on the decision to keep interest rates unchanged. In a statement released by the Federal Reserve, Waller said: As bank reserves gradually approach ample levels, it would be appropriate to further slow or halt the redemption of securities. However, in my view, we have not yet reached that point, as reserve balances exceed $3 trillion, which is ample. There are no signs from money market indicators or my external communications that the banking system is close to (only) adequate reserve levels. The Federal Reserve has various tools to address potential market disruptions that may arise during the reduction of its portfolio. Since the outbreak of the COVID-19 pandemic in 2020, the Federal Reserve has purchased a large amount of U.S. Treasury securities and mortgage-backed securities to mitigate market volatility and provide stimulus support to the U.S. economy. The total assets on the Fed's balance sheet soared to $8.97 trillion in April 2022, up from $4.2 trillion at the beginning of 2020. Starting in June 2022, the Federal Reserve began to reduce its asset holdings, a process known as quantitative tightening (QT). The Fed had previously slowed QT in June 2024, reducing the monthly cap on U.S. Treasury securities from $60 billion to $25 billion. Full Statement from Waller Below is the full statement made by Federal Reserve Governor Christopher Waller on the Federal Reserve's official website on Friday: At the recent Federal Open Market Committee meeting, I supported keeping the federal funds target range unchanged but leaned towards continuing to reduce the securities holdings at the current pace. Reducing the Federal Reserve's balance sheet is an important part of normalizing monetary policy and reducing excess reserves in the banking system. As we get closer to adequate reserve levels, it would be appropriate to further slow or halt the redemption of securities holdings. However, in my view, we have not yet reached that level, as reserve balances exceed $3 trillion, which is ample. There are no indications from money market indicators or my communications with the outside world that the banking system's reserve levels are approaching (only) adequate status. The Committee slowed the pace of redemptions in June 2024 to ensure a smooth transition to the appropriate level of securities holdings needed for effective monetary policy execution. I believe this pace remains appropriate. If unexpected reserve demand disruptions occur during the normalization of the balance sheet, the Federal Reserve has various tools to address such situations. Rather than changing the current pace of balance sheet reduction, it is better to rely on these tools and develop a plan to address short-term tensions so that we can quickly implement measures to inject more reserves into the banking system when needed Even if this meeting decides to slow down the pace of redemptions, a contingency plan will still be needed in case of future disturbances. Although this is a procedural issue, a good process can lead to good outcomes, and a well-developed emergency plan can help avoid market disruptions and support the FOMC in achieving our economic goals