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

Galtero Lara
Octubre 9, 2019

To reinforce his point, Powell added a quote from Marriner, who served as Fed Chairman from 1934 to 1948. The central bank dubbed the program "quantitative easing", or QE.

The Fed's goal "is to provide an ample supply of reserves to ensure that control of the federal-funds rate and other short-term interest rates" doesn't require regular market intervention by the central bank, Mr. Powell said. As a result, a crucial liability on the balance sheet - bank deposits held at the Fed, called reserves - have continued declining, and in recent weeks, stresses in very-short term funding markets suggested banks have grown reluctant to lend out of those reserves.

The purchases of Treasury bills that the central bank is contemplating to resolve those issues shouldn't materially affect the stance of monetary policy, he said.

The three-year note auction drew a high yield of 1.413 percent and a bid-to-cover ratio of 2.43, while the ten previous three-year note auctions had an average bid-to-cover ratio of 2.49.

Traders of short-term interest-rate futures are now pricing in more than an 80% chance of a third interest rate cut this year when the Fed next meets, October 29-30.

Both interest rate policy and the approach to the balance sheet came following a dissertation from Powell on "profound changes in the economy" and what challenges they present to current conditions.

The move is a tacit admission by the chairman that the Fed let the level of cash reserves fall too low. The Fed's next policy meeting is several weeks away "and we will be carefully monitoring incoming information", Mr. Powell said.

The job market has also downshifted, even as unemployment has fallen to a half-century low of 3.5%.

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The economy has recently shown signs of slowing as weakness overseas has spread to the United States and moved from domestic manufacturing industries to services.

While the jobs and inflation picture for the US economy has been favorable, Mr. Powell said global developments pose risks to this outlook, including from trade policy uncertainty and Britain's impending departure from the European Union.

"Thus, the now reported job gains of 157,000 per month on average over the past three months may well be revised somewhat lower", he said.

"Where we had seen a booming job market, we now see more-moderate growth", Powell said in a speech at an economic conference in Denver.

Money markets were roiled last month as a combination of corporate tax payments and the settlement of Treasury debt purchases temporarily sent short-term interest rates skyrocketing.

Since the start of this year, the Fed has reversed two of those hikes, and investors expect a third rate cut late this month, according to market gauges.

"That time is now upon us", Powell said of the plan to expand the balance sheet, stressing that it should be seen as a technical measure and not an effort to stimulate the economy. "That time is now upon us".

A jump in gas prices probably can be absorbed and likely would have little overall impact, he said.

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