To prevent liquidity support from being seen as QE, Federal Reserve's Logan proposes separate accounting for market functioning bond purchases and accelerated sales.

Federal Reserve officials are pushing for structural adjustments to the central bank's balance sheet management framework, with the core objective of completely separating market-functionality bond purchases from monetary policy operations, to eliminate market concerns about whether liquidity interventions are indirectly suppressing long-term yields.

Dallas Fed President Lorie Logan stated at the bank funding conference co-hosted by the Dallas Fed on Thursday that the Fed should account separately for assets purchased to maintain market functioning and commit to selling them as quickly as possible, to prevent such operations from unintentionally providing additional stimulus.

She also pointed out that a rapid rise in Treasury yields does not necessarily indicate a disorderly market situation requiring central bank intervention. Instead, the Fed relies more on liquidity indicators such as bid-ask spreads, market depth, and price shocks for assessment.

These remarks reflect the ongoing internal focus within the Fed on the blurred lines between market interventions during crises and quantitative easing.

Officials have traditionally relied on communication to distinguish between the two, but investors remain doubtful: if policymakers wish to prevent liquidity operations from being associated with yield curve control, is there a need for a clearer exit strategy mechanism?

Logan has put forward various proposals to more clearly distinguish market-functionality operations from monetary policy implementation.

The most practical suggestion is for the Federal Open Market Committee to hold securities purchased for market-function purposes in a separate account and publicly commit to selling them quickly, thereby establishing a hard boundary between the two types of operations at the structural level.

She emphasized that a full understanding of Fed decision-making logic is itself a stabilizing factor for the market.

"Greater public awareness of Federal Open Market Committee strategy can reinforce market confidence in its continued normal functioning. And when market participants are confident, they keep trading, which in turn reduces the likelihood that the Fed will need to intervene," Logan said.

This discussion comes as the Federal Reserve initiates a systematic review of its balance sheet management framework.

After taking office in May this year, Fed Chairman Walsh convened five external expert working groups to study key issues, including the balance sheet.

Last month, Walsh said that recommendations from the group responsible for this topic are expected in the first quarter of 2027, after which policymakers will begin reviewing 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 University economics professor Karen Dynan. Their core task is to explore how to reduce the scale of the Fed’s direct interventions in the market—one of Walsh’s longstanding policy priorities.

In her speech, Logan also offered specific suggestions for addressing liquidity pressures at financial institutions. She called on banks and other financial institutions to make thorough preparations, including ensuring they qualify for Fed emergency lending facilities in advance, rather than waiting to seek support only after a crisis erupts.

Logan also stated that financial market infrastructures designated as vital to the functioning of the financial system (DFMUs) should, under extreme circumstances, also be granted access to the discount window, and that this emergency funding tool should remain operational on weekends and public holidays.

This proposal addresses potential time gaps in the current mechanism, aiming to ensure that liquidity support is not interrupted at critical moments due to timing constraints.