Dallas Federal Reserve Bank President Lorie Logan indicated that money markets may experience temporary pressure around the upcoming quarter-end next month, but the Federal Reserve still has room to continue reducing its balance sheet.

In prepared remarks for a panel discussion at a conference hosted by Mexico's central bank on Monday, Logan stated: "We may see some temporary pressures around the tax date and quarter-end in September."

She noted that if such conditions arise, investors would likely utilize the Fed's overnight liquidity facilities again, similar to what occurred in June. The existence of these backstop arrangements "will enable us to continue gradually bringing reserves back to more efficient levels."

Since 2022, Federal Reserve officials have been reducing the balance sheet, aiming to lower reserves to the minimum adequate level that can avoid market disruptions, while reversing the trillions of dollars in asset purchases made to combat pandemic impacts and stimulate the economy.

This year, they have slowed the pace of balance sheet reduction, though discussions continue about how far they are from the endpoint. According to the latest Fed data, bank reserve balances currently stand at approximately $3.3 trillion. Fed Governor Christopher Waller recently estimated the minimum adequate level at around $2.7 trillion.

In her prepared remarks, Logan referenced repo market rates, noting they have averaged about 8 basis points below the rate the Fed pays on bank reserves in recent months.

"This tells me we have more room to reduce reserves," Logan said. "I think providing our rate ceiling tools while gradually reducing reserves, and encouraging market participants to use them when economically attractive, would be an effective strategy."

Logan is being considered by the Trump administration as a potential candidate to succeed Powell as Fed Chair when his term expires in May. In her prepared remarks, Logan did not comment on monetary policy or economic outlook. Last month, she indicated that labor market weakening "may" require interest rate cuts "before too long."

During the question-and-answer session following Monday's speech, Logan expressed satisfaction with the Fed's framework review, which concluded last week and updated the strategic documents guiding the Federal Open Market Committee (FOMC) decision-making process.

However, she noted that the central bank still has more work to do in improving communication methods. She mentioned potential adjustments to the quarterly Summary of Economic Projections (SEP), which contains anonymous policymaker forecasts.

"It's important for us to explore ways, whether in the SEP or possibly through other means, to avoid overemphasizing the median while overlooking diversity of views, and to think about how to communicate our reaction mechanisms under various different scenarios," Logan said. "I think discussions are likely to begin."