MNI POLICY: Fed to Announce Treasury Bill Buying Program Soon

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve will soon announce a plan to expand

its balance sheet again by purchasing Treasury bills, Chair Jay Powell said

Tuesday, seeking a buffer against volatility that briefly pushed the Fed's

policy rate above its target range last month. 

     The asset purchases have no bearing on the monetary policy stance, Powell

said, without giving details on how much the Fed plans to purchase. He

reiterated the Fed's pledge to "act as appropriate" to support growth in the

face of trade and geopolitical uncertainty.

     "My colleagues and I will soon announce measures to add to the supply of

reserves over time," Powell said in remarks prepared for a National Association

for Business Economists conference in Denver, Colorado. 

     "I want to emphasize that growth of our balance sheet for reserve

management purposes should in no way be confused with the large-scale asset

purchase programs that we 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." 

     --RESERVES BUFFER

     Even "routine" increases in funding pressures can lead to outsized

movements in money market interest rates if there are not enough reserves in the

banking system, Powell said. That in turn can impede the effective

implementation of monetary policy.

     Overnight repo rates were quoted as high as 10% one day last month on an

acute shortage of liquidity, triggered by large flows of corporate tax payments

and settlement of some Treasury securities. The fed funds rate also spiked,

prompting the Fed to conduct temporary open market operations. 

     The Fed's goal is to provide an ample supply of reserves to ensure that the

fed funds rate and other short-term interest rates are controlled by

administered rates and not through frequent market interventions, Powell said. 

     Demand for non-reserve liabilities, currency in particular, also grows over

time, so the Fed has long planned to resume asset purchases, he added. 

     --GLOBAL RISKS

     The U.S. labor market and inflation look "favorable," though trade

uncertainty and geopolitical events such as Brexit continue to pose downside

risks to the outlook, Powell said. 

     Inflation is "somewhat below" the Fed's 2% objective but has been

"gradually firming over the past few months," he said. Job gains are solid,

unemployment is at half-century lows and wages are rising. 

     Two Fed rate cuts this year "are providing support for the outlook," he

said, adding that officials will be carefully monitoring the situation into the

next FOMC meeting set for Oct. 29-30. 

     Futures traders ahead of Powell's remarks are pricing in 80% chance of

another quarter-point cut at that meeting. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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