To avoid liquidity support being seen as QE, Fed's Logan proposes separately accounting for market-functioning bond purchases and selling them as soon as possible.

Fed officials are pushing for a structural adjustment to the central bank's balance sheet management framework, with the core demand being to completely separate market-functioning bond purchases from monetary policy operations, in order to eliminate market concerns over whether liquidity interventions are indirectly suppressing long-end yields. Dallas Fed President Lorie Logan said on Thursday at a bank funding conference co-hosted by the Dallas Fed that the Fed should account separately for assets purchased to maintain market functioning and commit to selling them as soon as possible, to prevent such operations from unintentionally providing additional stimulus. She also noted that the rapid rise in Treasury yields does not necessarily mean the market has entered a state of disorder requiring central bank intervention; the Fed relies more on liquidity indicators such as bid-ask spreads, market depth and price impact as the basis for its assessment. The remarks reflect ongoing attention within the Fed to the blurred boundary between crisis-era market intervention and quantitative easing. Officials have traditionally relied on communication to draw the line between the two, but investors have always harbored doubts: if policymakers want to avoid linking liquidity operations with suppressing long-end yields, do they need to establish a clearer mechanism for the exit path? Separate accounting of assets: the core proposal to resolve market concerns Logan explicitly proposed multiple options to more clearly distinguish market-functioning operations from monetary policy execution. The most operational suggestion is: the Federal Open Market Committee should place securities purchased for market-functioning purposes into a separate account and publicly commit to selling them as soon as possible, thereby drawing a hard boundary between the two types of operations at the institutional level. She emphasized that the market's full understanding of the Fed's decision-making logic itself has a stabilizing function. "Greater public clarity about the FOMC's strategy can strengthen confidence that markets will continue to function normally. And when market participants have confidence, they will keep trading, which in turn reduces the probability that the Fed may need to intervene," Logan said. Balance sheet working group: reform roadmap gradually taking shape The discussion comes against the backdrop of the Fed launching a systematic review of its balance sheet management framework. After taking office in May this year, Fed Chairman Warsh convened five external expert working groups to study key issues, including the balance sheet question. Warsh said last month that recommendations from the working group responsible for the issue are expected in the first quarter of 2027, after which policymakers will review the relevant proposals. The balance sheet working group is co-led by former Fed Governor Jeremy Stein, former Reserve Bank of India Governor Raghuram Rajan and Harvard economics professor Karen Dynan. Its core task is to explore how to reduce the scale of the Fed's direct market involvementone of Warsh's long-standing policy priorities. Emergency funding facilities: expansion and normalization in parallel In her speech, Logan also offered specific suggestions on how financial institutions should respond to liquidity stress. She called on banks and other financial institutions to prepare as fully as possible, including meeting the conditions in advance to use the Fed's emergency lending tools, rather than seeking support only after a crisis erupts. Logan also said that "designated financial market utilities" (DFMU), recognized as critical to the functioning of the financial system, should also be allowed to borrow from the discount window under extreme circumstances, and that this emergency funding tool should operate as normal on weekends and holidays. This proposal points to a potential gap in time coverage under the current mechanism, aiming to ensure that liquidity support is not interrupted at critical moments due to timing factors. This article is reposted from "Wallstreetcn," author: Yang Chen, GMTEight editor: Li Cheng