MNI TRANSCRIPT: Powell: Reserves To Reach Ample Levels in Q2

     WASHINGTON (MNI) - The following is the portion of a transcript from

Federal Reserve Chairman Jerome Powell's press conference after the FOMC meeting

Wednesday:

     Q: I want to ask about the balance sheet. How many reserves are ample? How

many reserves does the Fed now think it will need to conduct policy in the

current framework, and can you walk me through how you and your colleagues are

arriving at that answer? 

     A: Sure. Thanks for that question. Why don't I say a few things about repo

because that will be of interest. To bring you back after September's brief

turmoil we took brief and prompt action and as a result money markets are

operating smoothly since then. Just to review, the two adjustments were Treasury

bill purchases of 60 billion at least into second quarter and term and repo at

least until April. I will get to the specific question. The purpose of the

adjustments is to ensure the policy transmitted smoothly to the Federal Funds

Rate which requires well-functioning money markets. It doesn't mean we're trying

to eliminate all volatility in the repo markets, we know that some volatility is

normal and expected in well-functioning markets. As I mention, these adjustments

have been successful in supplying an ample quality of reserves and money markets

operated smoothly through year end and the Federal Funds Rate remained in target

range. We'll know when the adjustments run their course when reserves as durably

at a level that enables us to control the Federal Funds Rate using

administrative rates on reserves and reverse repo, without need for frequent

market operations. Based on current projections, we expect the bill purchases

will durably bring the underlying level of reserves to the ample level some time

in the second quarter of this year. When we see that we've reached that level,

we'll begin to gradually reduce our asset purchases to the level of the

underlying trend growth for our liabilities. As bill purchases bring the

underlying level of reserves up to a ample level on necessary basis, the

necessary quantity of overnight and term repo will gradually decline and we've

already begun the reduction in the quality of repo and we'll continue to reduce

those offering amounts gradually as conditions permit. At some point we'll also

raise the minimum bid rate. Even after we reach an ample level of reserves, it's

possible that repo operations might play a role as a backstop and support

effective control of the Federal Funds Rate, and we'll continue to discuss that

issue in reviewing our implementation framework. Coming to our question, in

terms of the actually desired reserve level, we know that reserves will continue

to move up and down over the course of the calendar year in a wide range,

depending on volatility and non-reserve liabilities, particularly the treasury

general account or TGA, in particular reserve levels will need to be at a level

high enough to remain ample, even when the TGA peaks during the April tax

season. Effectively what that means is we need reserves at all times to be no

lower than they were in early September, and I would say around 1.5 trillion,

subject to learning more. Reserves are going to move in a broad range as I

mentioned, and we want to be clear that that will be the bottom end of the

range. We want 1.5 trillion or thereabouts to be the bottom end of the range, so

most of the time reserves will be moving in a range substantially higher than

that, but not going below 1.5 trillion, so it's not something that we're aiming

at all the time. We know that reserves will fluctuate and be substantially

higher than that most of the time. We also want interest on excess reserves and

Federal Funds Rate to be well reason the FOMC target range and we think that

will be the case now that we made the technical adjustment. Last points, we're

committed to making the adjustment process a smooth one, we'll provide more

details as we go and we expect to learn as we go, as we always have, and we're

prepared to adjust the details of the plan as necessary to foster efficient and

effective monetary policy implementation.

--MNI Washington Bureau; +86 (10) 8532-5998; email: ryan.hauser@marketnews.com

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