US Federal Reserve Governor Christopher Waller stated that he supports maintaining the current pace of balance sheet reduction, emphasising the need to slow or halt this process as reserves approach adequate levels.
He noted that reserve balances exceed $3 trillion, indicating a surplus. Waller expressed no signs from money market indicators suggesting that the banking system is nearing sufficient reserves. He reiterated the advantage of a gradual reduction pace starting in June 2024 and mentioned that the Fed has tools to address unexpected market disturbances, along with the need for a proactive response plan.
The US Dollar Index remained stable, increasing by 0.2% to 103.98 following his comments.
Steady Liquidity Withdrawal
Waller’s remarks point towards a steady course on balance sheet reduction, meaning liquidity withdrawal will continue as planned unless definitive signs emerge that reserve levels are becoming strained. Recent figures put these reserves well beyond $3 trillion, reinforcing that there is still excess liquidity in the system. His language suggests no urgency to slow down just yet.
We should take note of one crucial indication—money market signals do not currently point to any stress. If there were pressure building, we would likely see shifts in short-term borrowing costs or funding spreads. The absence of such movement grants policymakers room for patience. From June 2024, the pace of runoff will moderate slightly. This serves to minimise disruption while keeping the broader objective intact.
Given that unexpected shocks cannot be ruled out, Waller acknowledged that tools exist to intervene as necessary. Having contingency measures in place ensures that should conditions shift suddenly, the central bank can respond without hesitation.
Market Stability And Expectations
Separately, the US Dollar Index barely moved, ticking up 0.2% to 103.98. Traders clearly absorbed Waller’s remarks without reconsidering their positions in any substantial way. This stability suggests markets were already aligned with his messaging and did not see anything warranting a change in strategy.
For those engaging in derivatives, this environment offers relatively steady near-term expectations. A well-telegraphed approach from policymakers reduces uncertainty. However, even in times of predictability, one should not overlook potential catalysts that could introduce volatility—whether from economic data surprises, shifts in market liquidity, or global risk events.
