Federal Reserve Balance Sheet Explodes! Why Is Dollar Up/Gold Down?
Fed intends to increase balance
The Federal Reserve will begin to expand its balance sheet again soon, in part in response to the September credit turmoil, Chairman Jerome Powell said Tuesday..
He also noted that the approach should not be confused with the quantitative easing made during and after the financial crisis..
In terms of monetary policy more broadly, Powell stuck to his recent scenario in which he and his colleagues view the economy as strong but susceptible to shocks, especially from a global slowdown, trade, and geopolitics such as Brexit.. The Fed is in favor of supporting economic recovery, but this does not depend on the set rate of rate cuts.
The Fed cut its base rate twice in 2019 and is expected to approve a third cut in late October.
Powell’s statement helped stock indices cut some of its losses, but short-term Treasury yields continue to decline.
Massive reserve increases onto banks starting. Will it destabilize?
The buyback markets were in a fever a few weeks ago, due in part to funding constraints caused by money flowing out of the Fed as companies were making tax payments and the Treasury was holding bond auctions. Lack of funding has caused repo rates to rise to 10% and the Fed’s base rate that banks charge each other for short-term borrowing exceeded the target range by 5 basis points.
Since then, the Fed has adopted interim measures in which it provides cash in exchange for super safe assets.
Powell said the Fed is going to start more permanent operations to make sure the system has enough reserves and market volatility events are monitored..
Fed officials are considering the appropriate level of reserves to maintain in the system. The level of cash held by banks at the Fed has dropped to about $ 1.5 trillion from a peak of 2.8 trillion in September 2014 as the Fed ended its liquidity programs.
US President Donald Trump has sharply criticized the balance cut, calling it «quantitative tightening» and accusing it of slowing economic growth.