Fed chief, Jay Powell, indicates return to quantitative easing and potential interest rate cut in US next month

jay powell fed

The US Federal Reserve, “The Fed”, chairman Jay Powell, said today that it will restart purchases of Government bonds to expand its balance sheet in order to prevent a repeat of the recent disruption in short-term lending markets, chairman Jay Powell said on Tuesday. A process called QE or quantitative easing which was last deployed heavily post the financial crash of 2009.

At the Fed’s September meeting, they stated there were considering resuming “organic” expansion of the balance sheet by purchasing assets at a regular pace to match growth in its liabilities.

He said QE 5 was directed at solving “recent technical issues” rather than materially affecting “the stance of monetary policy.” and was not anywhere of the scale used in the financial crisis.

n recent weeks, the New York Federal Reserve has deployed billions into short-term lending markets to prevent a repeat of the problems in September this year when borrowing cash overnight, The Repo Rate, via repurchase agreements rose by around 10 percent.

The repo rate back has since been brought back within a normal range of around 1.8 per cent. Powell said “While a range of factors may have contributed to these developments, it is clear that without a sufficient quantity of reserves in the banking system, even routine increases in funding pressure can lead to outsized movements in money market interest rates. This volatility can impede the effective implementation of monetary policy, and we are addressing it. Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.. 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. That time is now upon us.”

However, commentators have stated that organic expansion of the balance sheet may not add reserves fast enough to solve the issue. Some suggest that they buy between $200 billion to more than $300 billion of shorter-dated Treasury bills over the next six months.

Powell also confirmed expectations of a 25 basis-point cut at its next October meeting as inflation remains subdued at 1.8 per cent, and has been at or below the Fed’s target. With a “symmetric approach” he downplayed the risk of cutting inflation risk too much and damaging the economy .. “We will act as appropriate to support continued growth, a strong job market, and inflation moving back to our symmetric 2 per cent objective.”