Fed’s Powell: Outlook ‘Favorable’, Measures to Address Liquidity Coming ‘Soon’

Andrew Cummings
October 9, 2019

The Fed has cut interest rates twice this year to help cushion the American economy against shocks from the US-China trade war, including a sharp drop in investment, and from plummeting demand from foreign markets.

But don't call in quantitative easing, or QE.

The Fed chief stressed that the growth of the Fed's balance sheet for reserve management purposes should not be confused with the large-scale asset purchase programs deployed after the financial crisis. "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". Futures were little changed after the release of Powell's comments.

"This volatility can impede the effective implementation of monetary policy, and we are addressing it", he added.

"We will be data dependent, assessing the outlook and risks to the outlook on a meeting-by-meeting basis, Powell said, repeating that as global risks evolve the Fed would move "as appropriate" to keep the decade-old expansion under way". Other recent economic data, including a possible contraction in manufacturing, add to the sense of a slowing economy.

The job market has also downshifted, even as unemployment has fallen to a half-century low of 3.5%.

"Thus, the now reported job gains of 157,000 per month on average over the past three months may well be revised somewhat lower", he said.

"Perhaps most importantly from my perspective as Fed Chair, he is responsible more than any other person for the fact that the United States today has an independent central bank-a central bank able to make decisions in the long-term best interest of the economy, without regard to the political pressures of the moment", Powell said.

The desired result would be lower and more stable short-term interest rates, hopefully adding stability to the financial markets.

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

The U.S. central bank will start expanding its balance sheet again, Powell said Tuesday at the annual meeting of the National Association for Business Economics.

The three-year note auction drew a high yield of 1.413 percent and a bid-to-cover ratio of 2.43, while the ten previous three-year note auctions had an average bid-to-cover ratio of 2.49. "That time is now upon us".

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