Federal Reserve chair Jerome Powell speaks at a meeting in Denver, Colorado, the US, October 8 2019. Picture: DANIEL BRENNER/BLOOMBERG
Federal Reserve chair Jerome Powell speaks at a meeting in Denver, Colorado, the US, October 8 2019. Picture: DANIEL BRENNER/BLOOMBERG

Washington — Federal Reserve chair Jerome Powell said on Tuesday the central bank will resume purchases of Treasury securities in an effort to avoid a repeat of recent turmoil in money markets, while leaving his options open on interest rates weeks ahead of policymakers’ next meeting.

“My colleagues and I will soon announce measures to add to the supply of reserves over time,” he said in the text of a speech to be delivered to the National Association of Business Economics in Denver.

He suggested that the purchases would be made up of Treasury bills and stressed the buying should not be seen as a return of the crisis-era quantitative easing programmes that the Fed engaged in a decade ago to boost the economy. Three-month bill yields fell on the comments, while US stocks pared losses and the dollar was higher.

“I want to emphasise that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programmes that we deployed after the financial crisis,” he said. “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.”

“This is not QE,” Powell said in a moderated discussion after delivering his speech.

The Fed has cut interest rates twice in 2019 to shelter the US economy from weak global growth and trade-policy uncertainty. Traders in federal funds futures are betting that the Federal Open Market Committee (FOMC) will reduce rates again at its October 29-30 meeting from the current target range of 1.75% to 2%. Futures were little changed following the release of Powell’s comments.

No preset course

“Looking ahead, policy is not on a preset course,” he said. “The next FOMC meeting is several weeks away, and we will be carefully monitoring incoming information.”

He said the actions that the Fed has already taken “are providing support for the outlook”, which remains favourable but faces risks, principally from global developments such as trade and Brexit.

But he added, “we will act as appropriate to support continued growth, a strong job market, and inflation moving back to our symmetric 2% objective”.

The economy has recently shown signs of slowing as weakness overseas has spread to the US and moved from domestic manufacturing industries to services.

“The decision to begin expanding the balance sheet again is about as clear a statement as possible that the Fed wants to make certain they do not inadvertently trigger a recession,” said Mark Vitner, senior economist at Wells Fargo, who attended the speech.

The job market has also downshifted, even as unemployment has fallen to a half-century low of 3.5%. Nonfarm payrolls grew by an average of 157,000 per month in the third quarter, compared with gains above 200,000 earlier in the expansion.

Powell said that work done by the Fed mining private-sector data suggested the most recent job gains may ultimately be revised lower, but that the pace would still be above the level needed to hold unemployment steady.

Money markets were roiled in September as a combination of corporate tax payments and the settlement of Treasury debt purchases temporarily sent short-term interest rates skyrocketing.

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

“We will not hesitate to conduct temporary operations if needed to foster trading in the federal funds market at rates within the target range,” Powell said.

“As we indicated in our March statement on balance sheet normalisation, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves,” he added. “That time is now upon us.”

With assistance from Christopher Condon

Bloomberg 

Federal Reserve chair Jerome Powell speaks at a meeting in Denver, Colorado, the US, October 8 2019. Picture: DANIEL BRENNER/BLOOMBERG
Federal Reserve chair Jerome Powell speaks at a meeting in Denver, Colorado, the US, October 8 2019. Picture: DANIEL BRENNER/BLOOMBERG