Jerome Powell, chairman of the Federal Reserve, speaks on Tuesday, October 8, 2019, during the NABE annual meeting in Denver, Colorado, USA.
Daniel Brenner | Bloomberg | Getty Images
The Federal Reserve will soon start growing its balance sheet again. This is a response to the pull in overnight credit markets in September, Chairman Jerome Powell said.
How the Fed will expand the securities According to the head of the central bank in a speech in Denver, the cuts in the coming days will be explained, even though they will be purchases of government bonds. Powell emphasized, however, that the approach should not be confused with quantitative easing during and after the financial crisis.
"This is not QE. In no sense is this a QE," he said in a question-and-answer session after the speech.
On broader monetary policy, Powell noted his recent script: He and his policy makers see the economy as strong but vulnerable to shocks, particularly due to a global slowdown, trade and geopolitics, such as a potentially chaotic Brexit , He said that the Fed was determined to support the recovery but was data-dependent and not dependent on a given rate of interest rate cuts.
The Fed cut its key interest rates twice in 201
It's time to expand A few weeks ago, partly because of funding constraints caused by the money being pulled out of the system when the companies made tax payments and the finance department did bond auctions. Due to the lack of funding, repo rates increased by up to 10% and the Fed's rate, which banks charge each other for short-term borrowing, was 5 basis points above target.
The Fed carries out temporary operations providing cash against ultra-secure assets.
Powell said the Fed is close to carrying out further long-term operations to ensure that the system has sufficient reserves and that market volatility events are under control.
"This volatility can hinder the effective implementation of monetary policy, and we agree," Powell said in prepared remarks. "In fact, my colleagues and I will soon announce action to increase the supply of reserves over time."
Fed officials have been thinking about the right amount of reserves to stay in the system. The cash holdings of banks at the Fed fell from a peak of $ 2.8 trillion in September 2014 to about $ 1.5 trillion when the Fed ceased its liquidity programs. Three rounds of quantitative easing or asset purchases led to a balance sheet of up to $ 4.5 trillion before the US Federal Reserve began running monthly revenues.
President Donald Trump sharply criticized the cut in the balance sheet and called it "quantitative tightening" Powell said the Fed is embarking on a "plentiful reserves" regime and now sees that it is at the level that banks need. As we indicated in our March statement on
In the normalization of balance sheets, we will eventually begin to increase our securities holdings to maintain an adequate reserve level, "he said." That time has now come. "
Though he did not specify how the Fed will proceed, he was quick to draw a line – that this program should not be confused with the three QE rounds, the aggressive expansion efforts were the balance sheet, instead this will be a more organic process Operations similar to those of the Fed before the financial crisis of 2008.
Both the interest rate policy and the balance sheet approach were, according to Powell's dissertation, "profound changes in the economy" and their challenges for the current environment represent.
He broke the challenges into three questions: how could a gas price increase affect the economy, whether productivity is adequately measured, and whether the labor market is tight?  An increase in gas prices is likely to be absorbed and would have little overall impact, he said. Current productivity measures are likely to be insufficient for technological reasons. And he said that jobs are likely to grow slower than the data show, even though they are still growing fast enough to accommodate new workers.