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Dallas Fed president calls for alternative tools to manage repo market issues

Federal Reserve Bank of Dallas President Robert Kaplan said Jan. 15 that he would like the Federal Reserve to find a way to temper balance sheet growth while still adequately managing repo operations.

The Fed should continue with its monthly purchases of about $60 billion in Treasury securities through March or April, Kaplan said, following a speech at The Economic Club of New York. He added that the Fed must then "find a way to curtail the balance sheet" while using other tools, such as a standing repo facility, that would activate when a spike in the repo rate occurs.

The statement comes amid the Fed's ongoing injection of billions of dollars into the financial system since mid-September 2019, when a liquidity crunch hit markets and caused the Fed's benchmark interest rate to breach its 25-point target range.

Kaplan said he feared that ongoing growth in the Fed balance sheet will fuel "elevated levels of risk assets," which may pose a threat to financial stability.

Additionally, Kaplan said he expects economic growth to fall in a range between 2% and 2.25% in 2020, driven by a strong consumer sector. He also called for inflation to continue gradually moving toward 2%.