By Jonnelle Marte

(Reuters) – Several elements of the strategy Federal Reserve officials used last time they reduced U.S. central banks’ balance sheets may be helpful in this cycle. One example is setting monthly limits on how many bonds can be redeemed.

Lorie Logan is the New York Fed’s head of market operations, and the manager of System Open Market Account. She said that the Fed employed an “organic process” when it reduced its 2018 and 2019 balance sheets. Officials chose to not sell assets. Instead, they made it a point not to reinvest maturing bonds and set limits on the number of bonds that could be redeemed every month.

Logan stated that the process of natural maturities, rather than sales or caps, seemed to have worked quite well during a Monday interview with Macro Musings. The podcast is produced by Mercatus Center, George Mason University.

Fed officials suggested they could be prepared to begin reducing central bank holdings of over $8 trillion in bonds this year. This was according to an account of December’s policy meeting.

Logan explained that Fed officials will closely watch markets when it shrinks its balance sheet, in order to identify signs that reserves are falling too low.

A number of Fed officials think that the new standing repo facility will be able to serve as a buffer and lower demand for reserve funds. According to the minutes from the Dec. 14-15 meeting. It could allow for a smaller balanced sheet than without this tool.

Logan stated that “the key point is the uncertainty in the long-term size of the balance sheets because banks demand for reserve funds changes over time.”