Powell says Fed will stick to quantitative tightening policy

Fed Chairman Jerome Powell said decisions on balance sheet management will be handled separately from the federal funds rate, the Fed’s main monetary policy tool. “They’re on their own separate tracks.”

Al Drago/Bloomberg

WASHINGTON — The Federal Reserve has cut more than $1 trillion in assets since last year, but officials say their quantitative austerity movement can continue for the foreseeable future.

Federal Reserve Chairman Powell said that the Federal Reserve balance sheet shrinkageThe program, which started in the summer of 2022 as part of its efforts to combat excessive inflation, is progressing “in line with expectations.” He added that there was no discussion of slowing down the current pace, which would see monthly spending fall by $95 billion on the books.

“We’re not talking about a change of pace [quantitative tightening],” Powell said at a press conference after the Federal Open Market Committee meeting on Wednesday.

Since the 2008 subprime mortgage crisis, the Fed has been influencing monetary policy by providing (and now removing) liquidity to financial markets through its balance sheet. It does this through quantitative easing, or the purchase of Treasury bonds and mortgage-backed securities. Quantitative tightening, allowing these assets to mature rather than replacing them.

The size of a central bank’s balance sheet has a direct impact on the banking system because it determines the supply of reserves that banks can hold at the Fed. Banks use reserves as a source of liquidity and as a means of settling transactions.

When reserves become scarce, banks tend to hoard them, disrupting monetary policy. Powell said the Fed was not in immediate danger of running into this problem.

“We’re not at that level yet. Reserves are close to $3.5 trillion … there’s not a lot of evidence to suggest that,” he said. “But we’re watching carefully and so far it’s working pretty much as expected.”

Powell added that the Fed plans to shrink its balance sheet more slowly as reserve balances approach scarcity. The FOMC will cut its runoff rate when reserve balances reach “a level consistent with abundance,” he noted, adding that it would stop shrinking its balance sheet. Balance reserves that are “slightly higher” than sample standards.

There are no set standards for what constitutes adequate reserves, but Federal Reserve officials have stated The balance sheet is unlikely to return to its pre-COVID-19 level of $4.1 trillion. During the pandemic, the central bank’s balance sheet ballooned to nearly $9 trillion. Current book assets are approximately $7.7 trillion.

Powell said the decrease in assets had been offset by a decrease in liabilities other than reserves, through the overnight reverse repurchase agreement facility, which is primarily used to money market mutual funds.

Powell said decisions on balance sheet management will be handled separately from the federal funds rate, the Fed’s main monetary policy tool.

“They are on their own separate track,” Powell said.

He added that if the rate cut was part of a “normalization” effort, balance sheet shrinkage could be maintained at the current pace, but if the rate cut was to stimulate a weak economy, further quantitative tightening might not be appropriate.

“We have to know what the reasons are to know whether it’s appropriate to do both at the same time,” he said.

At Wednesday’s meeting, the FOMC voted to maintain the target range for the benchmark interest rate at a range of 5.25% to 5.5% since July, a move that was in line with widespread expectations among financial market participants. The committee also said the Fed has completed its monetary tightening policy. policy and may start cutting interest rates next year. Stock markets reacted strongly, with several major indexes rising Wednesday afternoon. The Dow Jones Industrial Average, S&P 500 and Nasdaq all closed at 52-week highs.

Powell attributed the committee’s revised outlook to data analysis that has shown slowing economic activity and job growth in recent months, suggesting that rate hikes are on track to meet the Fed’s expectations.

“We’re seeing strong growth that appears to be slowing,” he said. “We’re seeing the labor market rebalancing through a number of measures, we’re seeing real progress on inflation. Those are our goals. We’ve always wanted to Look. We still have a long way to go. No one is declaring victory. It’s too early.”

The committee’s quarterly summary of economic forecasts, a survey of Fed governors and Reserve Bank presidents on a variety of economic indicators, showed all but two participants expected rate cuts in 2024. Fifteen of the 19 respondents expected rates at the midpoint of the target range to be between 4.375 and 4.875 next year. Such a shift would correspond to at least three 25 basis point interest rate cuts.

The survey is the first time since the Fed began raising rates in March 2022 that it predicts no future rate increases. Overall expectations for interest rates in 2025 and 2026 are also lower this quarter than last quarter.

However, Powell stressed that inflation remains above the Fed’s 2% target, adding that the forecasts only reflect the current views of participants and should not be viewed as a commitment to any specific future action.

“It’s not a plan — it’s just a cumulative number of what people have written,” Powell said. “We don’t argue about whose plan it is. [summary of economic projections] Yes, we just say what they are. “

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