Thursday, 17 October, 2019

Powell says the Federal Reserve will expand its balance sheet 'soon'

Federal Reserve Chairman Jerome Powell attends a panel at the Federal Reserve Board Building Friday Oct. 4 2019 in Washington Powell speech: Policy is never on a preset course, will change as appropriate
Russell Knight | 09 October, 2019, 19:29

Powell says expanding the Fed's balance sheet now as a short-term fix for a malfunctioning credit market - in particular the overnight "repo market".

For the first time since the financial crisis a decade ago, the New York Fed has had to repeatedly jump into financial markets in recent weeks to keep interest rates in the intended range. The Bank of Japan and European Central Bank have been conducting QE measures and planned to do more in 2020. Twice in the 1990s, he said, the economy similarly downshifted, only to gain steam once the Fed cut interest rates a few times. For months, the Federal Reserve telegraphed it will eventually need to expand its government bond holdings again to maintain an ample supply of banking reserves - essentially currency deposits at the central bank.

Markets have been waiting for the Fed to decide what permanent policies it might put in place to avoid the sort of disruption that occurred recently, when reserve shortages pushed the target federal funds rate to the top of the range set by the central bank - a situation that could disrupt the Fed's goals for monetary policy if it became a regular feature of financial markets. Other recent economic data, including a possible contraction in manufacturing, add to the sense of a slowing economy.

Speaking before the National Association for Business Economics in Denver, Powell said the plan to grow the balance sheet would be announced "soon." .

In St. Cloud, Minnesota, Minneapolis Fed President Neel Kashkari said he was "generally in favor" of lower interest rates, but, "I don't know how much lower they should go".

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Through an unconventional policy known as quantitative easing, the Fed more than quintupled the assets on its balance sheet to $4.5 trillion between 2008 and 2015.

"This volatility can impede the effective implementation of monetary policy, and we are addressing it", Powell said.

"We will be data dependent, assessing the outlook and risks to the outlook on a meeting-by-meeting basis", he said.

Powell also used his speech to let markets know the central bank would soon begin allowing its balance sheet to expand to ensure smoother functioning of USA short-term funding markets.

Mr Powell's remarks suggest the case for further cuts to the Fed's benchmark lending rates could be weakening, with employment data now showing the United States jobless rate fell to its lowest level in 50 years in September.

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