The Federal Reserve will soon resume purchases of Treasuries to expand its balance sheet in hopes of preventing a repeat of the recent disruption in short-term lending markets, chairman Jay Powell said on Tuesday.
Speaking in Denver, Mr Powell said the action differed from the crisis-era programme known as quantitative easing, and was directed at solving “recent technical issues” rather than materially affecting “the stance of monetary policy.”
“I want to emphasise that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis,” he told the National Association of Business Economists.
In recent weeks, the New York Fed has injected billions into short-term lending markets to ease the pressures that bubbled up in September and sent the cost of borrowing cash overnight via repurchase agreements spiking as high as 10 per cent.
Those measures have brought the so-called repo rate back within a normal range — about 1.8 per cent — but strategists say such pressures could crop up again without a more permanent fix.
“While a range of factors may have contributed to these developments, it is clear that without a sufficient quantity of reserves in the banking system, even routine increases in funding pressure can lead to outsized movements in money market interest rates,” Mr Powell said.
“This volatility can impede the effective implementation of monetary policy, and we are addressing it,” he added. “Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.”
At the Fed’s September meeting, Mr Powell said the Fed was considering resuming “organic” expansion of its balance sheet — purchasing assets at a regular pace to match growth in its liabilities.
“As we indicated in our March statement on balance sheet normalisation, at some point we will begin increasing our securities holdings to maintain an appropriate level of reserves,” he said in Denver. “That time is now upon us.”
Strategists had warned that “organic” expansion of the balance sheet may not add reserves fast enough to correct the problem and return funding markets to their normal functioning, making the case instead for the Fed to buy anywhere from $200bn to more than $300bn of shorter-dated Treasury bills over the next six months.
Mr Powell also appeared to confirm market expectations of a 25 basis-point cut at its October meeting to add further insurance against uncertainty over “trade, Brexit, and other issues.”
“We will act as appropriate to support continued growth, a strong job market, and inflation moving back to our symmetric 2 per cent objective,” he said.
The Fed’s preferred inflation measure currently sits at 1.8 per cent, and has been at or below the Fed’s target for most of the recovery. With the word “symmetric,” Mr Powell appeared to be downplaying the risk of overshooting the Fed’s target.