NEW YORK, Nov 30 (Reuters) – Senior Federal Reserve officials are showing no appetite to slow the pace of the central bank’s balance sheet shrinking, pushing back claims from outside observers that money market conditions will bring a premature end to the program.
Fed Chair Jerome Powell and New York Fed President John Williams, whose bank administers the program, both said this week they see no reason for them to let about $95 billion worth of Treasuries and mortgage-backed securities mature $ 8.6 trillion investment portfolio.
The program is part of a broader effort to tighten financial conditions to help stem the highest inflation in four decades. The main thrust of this campaign relies on steady hikes in the Fed’s short-term interest rate target while the balance sheet steadily shrinks in the background.
Fed officials have not said how far they intend to reduce holdings or how long the process will take. However, some analysts believe that banks’ reserves will fall enough over the next year that the Fed will be forced to slow or even halt the decline.
Right now, the banking system is filled with $3 trillion in reserves, about $1 trillion down from a year ago. And as long as reserve levels are robust, the Fed’s interest rate control toolkit will allow it to keep the federal funds’ interest rate range, now between 3.75% and 4%, at levels set by the central bank.
But when reserves run low, it can confuse short-term interest rate markets and make monetary policy more difficult to conduct.
That happened in September 2019, when the Fed last shrank its balance sheet. Then the Fed was forced to inject liquidity into the markets by borrowing and buying government bonds to restore calm in money markets.
However, Powell and others believe that is nowhere near the case.
“We’re not close to a reserve shortage,” Powell said in an appearance Wednesday in Washington.
Williams told reporters Monday his bank is constantly checking with the financial industry to monitor the situation. He noted that banks are running down reserves, and they seem to be doing so happily.
Williams added that he wasn’t worried about a potential liquidity shortage stemming from just over $2 trillion in money market funds and other eligible entities parked in the Fed’s reserve repo facility. He suggested that this was a pool that could be drawn should any type of liquidity squeeze develop.
“Everything is working, you know, pretty much as planned,” he said.
However, Powell suggested the Fed would avoid repeating the experience of 2019, when it overdraw reserves.
“The demand for reserves is not stable, it can move up and down very strongly. That’s why we want to stop in a safe place,” he said. “It’s really a public benefit to have a lot of reserves, a lot of liquidity in the markets and in the banking system, in the financial system in general.”
Reporting by Michael S. Derby; Adaptation by Dan Burns and Stephen Coates
Our standards: The Thomson Reuters Trust Principles.
Comments are closed.