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 firstname.lastname@example.org
(END) Dow Jones Newswires
December 11, 2019 18:24 ET (23:24 GMT)
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