President of the Federal Reserve Bank of Cleveland, Beth Hammack, has expressed her views on the central bank's approach to quantitative tightening (QT) during a period of uncertain government finances. In an interview with Reuters, Hammack highlighted her preference for continuing the balance sheet reduction while addressing potential liquidity challenges. She emphasized that temporary bond repurchases could be used to manage liquidity distribution if necessary. Hammack also discussed the Fed's cautious stance on interest rate hikes despite ongoing inflation pressures. The article delves into the complexities surrounding QT and how the Fed plans to navigate market conditions in light of government spending adjustments and debt ceiling resolutions.

Hammack's comments come at a time when policymakers are evaluating the pace of QT. The Federal Open Market Committee (FOMC) minutes from late January revealed concerns about market liquidity during this period. Officials are wary of withdrawing too much liquidity, which could destabilize money markets and affect the federal funds rate. Since 2022, the Fed has allowed its portfolio to decrease from $9 trillion to $6.8 trillion by not replacing expired Treasury and mortgage bonds. Hammack believes QT can continue for a longer duration, using repos to manage liquidity as the Treasury adjusts its finances post-debt ceiling resolution.

The official stated that selling mortgage bonds is unlikely in the long run, as they have been slow to expire despite the Fed's goal of holding mostly Treasuries. Hammack also noted that the public's expectations of future inflation remain stable, although she remains vigilant about recent data suggesting higher inflation expectations. Additionally, she mentioned that it is premature to assess the impact of trade tariffs on inflation, as everything depends on actions taken and international responses.

Hammack underscored the importance of patience in monetary policy, especially given the robust job market and uneven inflation trends. She indicated that keeping the federal funds rate steady for an extended period might be necessary. While she does not foresee a rate hike if inflation pressures persist above the 2% target, she acknowledged that such a move remains a possibility. Overall, Hammack's remarks reflect a balanced approach to navigating financial uncertainties while ensuring market stability.