Powell says the Fed will start expanding balance "soon"

Jerome Powell, Chairman of the Board of the U.S. Federal Reserve, speaking at NABE's Annual Meeting in Denver, Colorado, USA, Tuesday, October 8, 2019.

Daniel Brenner | Bloomberg | Getty Images

The Federal Reserve will soon begin to increase its balance sheet again, partly a response to shocks to overnight lending markets in September, chairman Jerome Powell said Tuesday.

How the Fed will go about expanding securities holdings will be explained in the coming days, even if state tax purchases will be involved, the governor said during a speech in Denver, though Powell emphasized that the approach should not be confused with the quantitative relief that was made during and after the financial crisis.

"This is not QE. By no means is this QE," he said in a question and answer session after the speech.

On monetary policy more broadly, Powell held on to the recent script: He and his co-policy makers view the economy as strong but subject to shock, especially from a global downturn, trade and geopolitics as a potentially messy Brexit. He said the Fed is keen to support the recovery, but is computer-dependent and not on a pre-set course to cut interest rates.

The Fed has lowered the reference rate twice in 201[ads1]9 and is expected to approve a third cut late in the month. [19659002] Stocks pared some of their losses when Powell spoke while short-term interest rates had drawn the current lows.

Time to expand "is now upon us"

In the balance sheet, overnight buy-back markets did not work for several weeks ago, partly due to funding constraints caused by money being sucked out of the system as companies made tax payments. and the Ministry of Finance decided on bond auctions. The lack of funding caused reporters to rise as high as 10% and the Fed's benchmark interest rate, which banks charge each other for short-term loans, exceeded their target range by 5 basis points.

Since then, the Fed has been conducting interim operations providing cash in exchange for ultra-secure assets.

Powell said the Fed is embarking on more permanent operations to ensure that the system has enough reserves and market volatility events are monitored.

"This volatility can hinder effective monetary policy implementation, and we are addressing it," Powell said in prepared remarks. "In fact, my colleagues and I will soon announce measures to increase the supply of reserves over time."

Fed officials have been thinking at the right level of reserves to keep the system. The cash level that banks store in the Fed has dropped to around $ 1.5 trillion from a peak of $ 2.8 trillion in September 2014 as the Fed closed liquidity programs. Three rounds of quantitative easing, or asset purchase, took the balance to as high as $ 4.5 trillion before the Fed began to roll off its revenue each month.

President Donald Trump has sharply criticized the reduction in the balance, calling it "quantitative tightening" and accusing it of slowing economic growth.

Powell said the Fed is stepping into a "plentiful reserve" regime and now sees that it is around the level that banks need.

"As we suggested in our March statement on normalizing the balance sheet, at some point we will begin to increase our securities holdings to maintain an appropriate level of reserves," he said. "That time is now upon us."

While not specifying how the Fed will proceed, he was quick to draw a line – that this program should not be confused with the three rounds of QE, which was an aggressive effort to expand the balance. Instead, this will be a more organic procedure that will follow operations similar to what the Fed conducted prior to the 2008 financial crisis.

Both interest rate policy and the balance sheet approach came after Powell's thesis on "profound changes in the economy" and the challenges they face on current conditions.

He addressed the challenges of three questions: how a gas price increase can affect the economy, whether productivity is adequately measured, and whether the labor market is tight. [19659002] A jump in gasoline prices could probably be absorbed and would probably have little overall impact, he said. Current productivity measures are likely insufficient due to technological factors, he added. And he said jobs are likely to grow slower than the data indicates, though they are still expanding fast enough to absorb new players into the workforce.

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