Powell Confident About Year-End, but Says Fed Asset Buying Open to Change
December 11 2019 - 6:39PM
Dow Jones News
By Michael S. Derby
Federal Reserve Chairman Jerome Powell said Wednesday the
central bank's three-month effort to restore calm to financial
markets is working, but he also signaled a willingness to be
flexible if events require it, including buying longer-dated
Treasurys.
Since the Fed began adding liquidity to short-term markets,
those parts of the financial system have been "functioning well"
and "short-term rates are stable," Mr. Powell said at a news
conference that followed the conclusion of the most recent Federal
Open Market Committee meeting.
The Fed leader was taking stock of what the Fed has been doing
to address an unexpected surge in short-term borrowing costs that
happened just ahead of the Fed's September FOMC meeting. Many
observers tied the tumult then to a tax-payment date and settle of
large government-debt auctions, amid other forces.
That turbulence in what is called the repurchase agreement
market, where participants borrow and lend cash and securities for
the short term, even drove the central bank's federal-funds rate to
break out of its target range, which central bankers didn't want to
happen.
The Fed resorted to large short-term additions of liquidity, via
repo operations, for the first time in just over a decade to
restore calm. As of last week, some $200 billion of these temporary
operations are outstanding. It also began buying around $60 billion
in Treasury bills starting in October, which it hopes will build up
reserves in the financial system and reduce the need for more repo
interventions early next year.
Since the Fed began its interventions, short-term rates have
been well behaved. But there is still widespread uncertainty about
what will happen at the turn of the year, when many financial firms
may be reluctant to lend for a variety of reasons.
"Temporary upward pressures on short-term money market rates are
not unusual around year-end," Mr. Powell said. "We think that the
pressures appear manageable," he said.
But he added, "we stand ready to adjust the details of our
operations as necessary to keep the federal-funds rate in the
target range."
Notably, Mr. Powell said the Fed could change the securities it
is buying. "We are not at this place, but if it becomes appropriate
for us to purchase other short-term coupon securities, we would be
prepared to do that, if the need arises," Mr. Powell said.
The Fed's bill buying has become a sticky issue for some
observers who see any type of asset buying as a replay of
crisis-era monetary policy. Then, the Fed bought longer-dated
Treasury and mortgage securities to provide stimulus after
short-term rates were lowered to near-zero levels. Fed officials
have countered that bill buying is entirely about market conditions
and not a form of stimulus, in large part because the purchases
aren't aimed at lowering long-term borrowing costs.
A report this week from Credit Suisse said brewing trouble in
short-term markets means the Fed will have start buying
longer-dated securities, with bank analyst Zoltan Pozsar calling
the predicted effort "QE4," in reference to past asset-buying
stimulus efforts.
Mr. Powell refrained from saying if frictions in money markets
are a deeper issue that requires a broader solution. The Fed's
regulatory chief Randal Quarles noted recently central-bank
regulations may be driving banks to hoard liquidity and not lend
it. And a recent report from the Bank for International Settlements
said repo markets likely face a deeper problem due to repo lending
concentration in firms that are reluctant to lend funds in times of
stress.
At the Fed's meeting in late October, officials weighed whether
they will need to keep going with liquidity operations over a
longer horizon, on an as-needed basis. They also considered
adopting what is called a standing repo facility that would allow
eligible firms to convert Treasurys into liquidity quickly at the
Fed, capping short-term rate surges.
Mr. Powell indicated that the Fed is looking at rule changes.
"We are open to ideas for modifying supervisory and regulatory
practice, in ways that don't undermine safety and soundness and a
number of ideas are under examination," he said. But the
central-bank chief was noncommittal about the adoption of the
standing repo facility.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
December 11, 2019 18:24 ET (23:24 GMT)
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