Waller’s comments suggest that the Federal Reserve is not in any hurry to slow down the reduction of its balance sheet. He sees no immediate signal that reserves are running low, reinforcing the view that the existing strategy should remain unchanged for now.
Liquidity In The Banking System
The assessment highlights that despite ongoing reductions, liquidity in the banking system remains ample.
We must recognise what this means—there is no perceived stress in reserve availability yet. As long as policymakers believe that the financial system can handle continued reductions, expectations of an imminent slowdown in balance sheet runoff may be premature. This should be considered when assessing short-term market conditions.
Logically, this affects expectations around liquidity in financial markets. If reserves were thought to be approaching a constrained level, discussions about slowing the runoff would gain momentum. However, given Waller’s position, those concerns do not seem warranted for the time being. The notion that more liquidity tightening is required through balance sheet reductions remains intact.
Short-term interest rate movements should be watched carefully. If reserves were to approach a level that policymakers deemed too low, adjustments would likely come through either a slowdown in runoff or other policy tools. But presently, such a shift does not appear on the horizon.
Implications For Financial Markets
Waller’s stance leans towards continuing with the current trajectory, which has implications for liquidity-sensitive assets. Expectations of sudden shifts in policy due to reserve scarcity do not align with this perspective. As a result, this view must be incorporated into forward-looking assessments to avoid misjudging potential shifts in financial conditions.
With reserves still at a high level, there is little justification for anticipating an abrupt reversal. If future data were to suggest higher demand for liquidity, policymakers could reassess. However, based on Waller’s remarks, that moment has not arrived.
