Potential Federal Reserve Chairman candidate Logan's wind: There is still room for balance sheet reduction, and the currency market may face another test in September.

Dallas Fed President Logan said that the money market may face temporary pressure around the end of next month's quarter, although the Fed still has room to continue reducing its balance sheet. Logan said at a meeting on Monday, "We may see some temporary pressure in September around tax day and the end of the quarter. If this happens, investors may once again use the Fed's overnight liquidity tools, and the existence of these support measures will allow us to continue gradually reducing reserves to a more efficient level." Since 2022, the Fed has been reducing its balance sheet, aiming to reduce reserves to the "minimum sufficient level" to avoid market disruptions. This move reverses the trillions of dollars in asset purchases made earlier to respond to the pandemic shock and stimulate the economy. This year, the Fed has slowed the pace of balance sheet reduction. However, they are still discussing how far they are from the finish line. According to the latest Fed data, bank reserve balances are currently around $3.3 trillion. Fed Governor Christopher Waller estimates that the minimum sufficient level is around $2.7 trillion. Logan mentioned the repo market rate, saying that it has been on average about 8 basis points lower than the interest rate the Fed pays on bank reserves in recent months. She said, "This tells me that we have more room to reduce reserves. I believe that gradually reducing reserves while continuing to provide our upper tools and encouraging market participants to use them when economically attractive will be an effective strategy." It is worth mentioning that Logan is a potential candidate considered by the Trump administration to succeed Powell as Fed chair after his term ends in May next year. In a prepared speech, she did not comment on monetary policy or economic outlook. Last month, she said that a weak job market could "potentially" require a "prompt" rate cut. After delivering her speech on Monday, Logan said she was satisfied with the Fed's framework review. Last week, the Fed updated the strategic document guiding the decision-making process for FOMC interest rate setting. However, she said that the Fed still has more work to do in improving communication. She mentioned that adjustments may be needed to the Summary of Economic Projections (SEP), which includes anonymous policy makers' forecasts released quarterly by the Fed. Logan said, "For us, it is important to explore ways to avoid overly emphasizing the median and neglecting diverse views, while also thinking about how to better communicate our response functions in different circumstances. I think this discussion is likely to happen soon."