A Horse Is A Horse … Fed Chair Powell Announces New QE … That Is Not QE?

A horse is a horse, of course, of course, but no one can talk to a horse, of course. Unless, of course, that certain horse is … Jerome Powell!

(Bloomberg) Federal Reserve Chairman Jerome Powell said the central bank will resume purchases of Treasury securities in an effort to avoid a repeat of recent turmoil in money markets, while hinting at the possibility of another interest rate cut.

“My colleagues and I will soon announce measures to add to the supply of reserves over time,” he told a National Association for Business Economics conference in Denver on Tuesday.

The Fed chief suggested that the purchases would be made up of Treasury bills and stressed the buying should not be seen as a return of the crisis-era quantitative easing programs that the Fed engaged in a decade ago to boost the economy. Three-month bill yields fell on the comments.

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“I want to emphasize 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 said. “Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy.”

“In no sense, is this QE,” Powell said in a moderated discussion after delivering his speech.

The Fed has cut interest rates twice this year to shelter the U.S. economy from weak global growth and trade-policy uncertainty. Traders in federal funds futures are betting that the Federal Open Market Committee will reduce rates again at its Oct. 29-30 meeting from the current target range of 1.75% to 2%.

Another Cut
In the question and answer period after his speech, Powell compared the current period to two instances in the 1990’s when the Fed cut rates three times in a successful effort to keep an economic expansion on track.

Powell’s comments suggest the Fed is inching closer to reducing rates at the upcoming meeting “but it’s not a done deal,” said Michael Gapen, chief U.S. economist at Barclays Plc.

“Another rate cut as early as this month remains a real possibility,’’ agreed Sarah House, senior economist, Wells Fargo & Co., who attended the Denver conference.

Powell told the gathering that the actions the Fed has already taken “are providing support for the outlook,” which remains favorable but faces risks, principally from global developments such as trade and Brexit.

“The broader geopolitical risks are important right now,’’ Powell said. “You have to be watching those carefully and assess the implications.”

Slowing Economy
The economy has recently shown signs of slowing as weakness overseas has spread to the U.S. and moved from domestic manufacturing industries to services.

The job market has also downshifted, even as unemployment has fallen to a half-century low of 3.5%. Nonfarm payrolls grew by an average of 157,000 per month in the third quarter, compared with gains above 200,000 earlier in the expansion.

Powell said that work done by the Fed mining private-sector data suggested the most recent job gains may ultimately be revised lower, but that the pace would still be above the level needed to hold unemployment steady.

He voiced confidence though that the economic expansion would remain on track. “This feels very sustainable,’’ [That’s what she said!]

Repo Market
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.

The Fed announced last week that it will extend through October the ad hoc liquidity lifeline that it’s been offering to U.S. funding markets since then.

“We will not hesitate to conduct temporary operations if needed to foster trading in the federal funds market at rates within the target range,” Powell said.

“As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves,” he added. “That time is now upon us.”

Well, maybe not right now.

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