Feds Powell: Outlook Favorable, Measures to Address Liquidity Coming Soon

DENVER—U.S. Federal Reserve chairman Jerome Powell on Oct. 8 flagged openness to further rate cuts amid global economic risks and said the time to allow the Feds asset holdings to begin to expand again “is now upon us” in order to ensure money markets function smoothly.

Powell, while not committing to further rate cuts, noted recent data revisions showed less job growth in the year to March than previously estimated, turning a “booming” market into one of moderate growth. Other recent economic data, including a possible contraction in manufacturing, add to the sense of a slowing economy.

“It seems that Powell is trying to, in a soft way, demonstrate to the market that the Fed continues to be aware of the downside risks and is actively willing to support the economic expansion as needed,” said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.

Recent volatility in U.S. short-term funding markets raised concern that the Fed had allowed its balance sheet to become too small, leaving banks with an inadequate supply of reserves to manage occasional periods of high demand.

Powell said the Fed would “soon announce measures to add to the supply of reserves over time.”

The Fed had been shrinking its balance sheet in recent months as it unwound crisis-era bond buying programs. The fact that it will begin growing again should not be read as an effort to stimulate the economy, Powell said, but rather to meet the publics demand for cash, bank demand for reserves and to carry out other core Fed functions.

Markets have been waiting for the Fed to decide what permanent policies it might put in place to avoid the sort of disruption that occurred recently, when reserve shortages pushed the target federal funds rate to the top of the range set by the central bank – a situation that could disrupt the Feds goals for monetary policy if it became a regular feature of financial markets.

U.S. Treasury prices rose after Powells comments on the balance sheet, while stocks pared losses.

Dealing with Data

In his comments here to the National Association for Business Economics, Powell did not commit to further rate cuts, and noted that the economic outlook remained “favorable” and continued growth “most likely.” But he noted that over the course of the past year central bank officials have shifted their “views about appropriate monetary policy toward a lower path for the federal funds rate,” and already reduced rates by half a percentage point.

Those steps “are providing support for the outlook,” Powell said. But he repeated that as global risks evolve the Fed would move “as appropriate” to keep the decade-old expansion under way.

“We will be data dependent, assesRead More – Source