Fed’s Powell Signals Resumption Of Balance Sheet Growth
Citing unexpectedly intense volatility in wholesale funding markets, Federal Reserve Chairman Jerome Powell indicated on Tuesday that the central bank intends to resume increasing the size of its balance sheet.
Powell noted in remarks at the National Association for Business Economics annual meeting in Denver, Colorado, that notable liquidity pressures in money markets in mid-September caused overnight interest rates to spike, with the effective federal funds rate briefly moving above the Fed’s target range.
The Fed responded by conducting temporary open market operations, which Powell said kept the federal funds rate in the target range and alleviated money market strains more generally.
“While a range of factors may have contributed to these developments, it is clear that without a sufficient quantity of reserves in the banking system, even routine increases in funding pressures can lead to outsized movements in money market interest rates,” Powell said.
“This volatility can impede the effective implementation of monetary policy, and we are addressing it,” he added. “Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.”
Powell pointed out that increasing the supply of reserves or even maintaining a given level over time requires the Fed to increase the size of its balance sheet.
“As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves,” Powell said. “That time is now upon us.”
The Fed chief stressed that the growth of the Fed’s balance sheet for reserve management purposes should not be confused with the large-scale asset purchase programs deployed after the financial crisis.
“Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy,” Powell said.
With regard to the U.S. economic outlook, Powell said the Fed continues to see a sustained expansion of economic activity, strong labor market conditions, and inflation near the symmetric 2 percent objective as most likely.
However, Powell noted there are risks to this favorable outlook due in part to uncertainties around trade, Brexit, and other issues.
“As those factors have evolved, my colleagues and I have shifted our views about appropriate monetary policy toward a lower path for the federal funds rate and have lowered its target range by 50 basis points,” Powell said. “We believe that our policy actions are providing support for the outlook.”
“Looking ahead, policy is not on a preset course,” he added. “The next FOMC meeting is several weeks away, and we will be carefully monitoring incoming information. We will be data dependent, assessing the outlook and risks to the outlook on a meeting-by-meeting basis.”
Powell reiterated his pledge to “act as appropriate” to support continued growth, a strong job market, and inflation moving back to the Fed’s symmetric 2 percent objective.
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