Powell is facing early calculations on Fed's $ 4-trillion questions

By Jonathan Spicer and Ann Saphir

NEW YORK / SAN FRANCISCO (Reuters) ̵[ads1]1; Federal Reserve Chairman Jerome Powell has a problem: how to explain that the Fed may soon start losing its ongoing activity start without looking like it is going Down for an upcoming recession, or caving for US President Donald Trump.

Not long ago, Powell expected to face this delicate communication test ever later in 2019, rather than on his press conference on Wednesday following the end of the Fed's first political meeting of the year.

But three things – an unexpected lack of reserves deep in plumbing plumbing, open public pressure from investors and the White House, and Fed's own decision to reassess interest rates – are forcing the US central bank to recognize the real possibility of hanging more bonds than originally planned.

"You can't stop the training cycle without communicating on the balance as well as l," says Thomas Costerg, senior American economist at Pictet Wealth Management, in Geneva, Switzerland.

A larger balance can lead to a general relief of Market borrowing costs and currency value of the dollar, relief comes from emerging markets, which can also affect Fed's appetite for buying bonds in the face of a future downturn in the US

The Fed has been methodically trimming its balance sheet for more than a billion dollars over a year – from nearly $ 4.5 billion to about $ 4.1 billion and falling – without much notice.

Instead, it has kept the world's eyes trained on a number of interest rate increases, which, according to cautious police reports in recent weeks, may have

But last year, prominent investors took blame on the Fed's balance sheet for market volatility, to emphasize what they saw as the harmful limiting effects of F Ed's reversal of his tape purchase stimulation, called the program called quantitative relief in the financial crisis to jump into the economy, doubled the drainage "quantitative tightening." [19659010] In December, Trump reinforced this issue and tweeted that the central bank should not "make another mistake" and "Stop with 50 B's" – a reference to a maximum of $ 50 billion in bonds where the Fed has shrunk the portfolio each month, according to a plan it outlined and began in 2017.

One day after the tweet, when Powell said the drain remained on "automatic pilot", Standard & Poor's 500 share index delivered its worst 60-minute selloff for at least a year.

Two weeks later, when Powell stressed that the plan was actually flexible, the index gave its best 60 minutes of at least a year.

Trumps tweet revealed a dilemma for the Fed: though its 2017 plan divorced ball market policy from monetary policy, markets see a stronger context. If the Fed is to hold onto its weapons and keep its balance from becoming a first responder tool against economic ups and downs, Powell must keep the divorce on the books.

"I don't think they should stop," says Chuck Self, chief investment officer at iSectors LLC, in Appleton, Wisconsin. "They want to get it as low as possible without disturbing the economy."

A READY CART [[19659015] The central bank is now approaching the point where its balance sheet needs to be adjusted, not because of the state of the domestic economy, which appears to be strong, but due to plumbing in short-term markets.

As the portfolio has gone down, the banks have trimmed the reserves they hold at the Fed with even greater amounts, and put a burden on Fed's ability to control the short-term policy rate that governs monetary policy.

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Economists had already speculated last summer that they were dealing with a lack of reserves, and the resulting upward pressure on inter-pricing beyond a target area would have to end two years earlier and leave the Fed with $ 1 trillion more than It had been going.

The Fed aims to trim its portfolio to an unspecified level by which the demand for reserves matches the offer – but not as low as $ 900 billion it held before the 2007-2009 recession requested it to begin buying.

"It will be significantly smaller than it is now … but not near where it was before," said Powell on January 10, which meant any decision as a technical and not a referendum on the overall policy.

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