Insights from Cleveland Fed President Beth Hammack

By Michael S. Derby

NEW YORK (Reuters) – Conditions still support ongoing reductions in the Federal Reserve’s balance sheet, Cleveland Fed President Beth Hammack said on Wednesday. She remarked that amid great uncertainty, now is not the time to change monetary policy.

> “This is not a good time to be preemptive” with monetary policy, she stated, emphasizing the need for patience and to await incoming data before adjusting interest rates.

At a meeting of the Money Marketeers of New York University, Hammack elaborated on her views regarding the Fed’s balance sheet, noting:

> “We still appear to have more than enough reserves in the system so that active management isn’t needed.”

With potential for continued reduction in Fed holdings—known as quantitative tightening (QT)—Hammack noted the financial stability risks associated with maintaining a large balance sheet. She explained that a large balance sheet with ample reserves can suppress money market volatility, which in turn might encourage risk-taking in financial markets.

Hammack suggested that the Fed could resort to temporary market interventions to stabilize short-term volatility swings:

> “There may be scenarios where the Federal Reserve would need to add temporary liquidity,” she said, mentioning that the New York Fed could use its open market operations if necessary.

Recently, the Fed opted to slow the drawdown of its Treasury and mortgage bond holdings significantly. Since 2022, the Fed has been allowing its bonds to mature without replacement, twice decelerating the pace of this contraction to avoid withdrawing liquidity too quickly.

Hammack supported this slower drawdown, stating:

> “While there were still enough reserves to proceed, I expect that by slowing the pace of runoff, we will be able to let the process continue for longer.”

She emphasized that this reduced pace should not be interpreted as a sign of a permanently larger balance sheet than would have been the case without the slowdown.

Through QT, the Fed is retracting funds it introduced during the COVID-19 pandemic, having more than doubled its holdings to $9 trillion. Currently, it has reduced its balance sheet to $6.8 trillion.

It remains uncertain how far the Fed can shrink its assets while ensuring enough liquidity for normal market fluctuations and maintaining control over short-term interest rates.

Fed officials believe that the newly adjusted pace of drawdown will enable QT to reach an appropriate endpoint without disrupting the markets.

Hammack’s comments prior to the Fed’s March policy meeting hint at her preference for a steadier QT pace and the utilization of repo operations to manage liquidity needs tied to government cash management efforts.

The focus on the Fed’s balance sheet has intensified in light of high market volatility due to President Donald Trump’s tariff-related decisions. Some have speculated whether the Fed might need to buy bonds for market stabilization if trading becomes excessively chaotic.

Despite the volatility, Hammack observed that markets appear orderly, allowing investors to reposition their assets. Echoing Fed Chairman Jerome Powell, she affirmed:

> “I think there has to be an incredibly high bar for the Fed to step in and declare that things aren’t working. We need to be there” to support markets.