Measures to add to the supply of reserves in the banking system over time will soon be announced, with a goal of ensuring ample reserves in place to deal with changes in the economy and precluding “frequent market interventions,” the chair of the nation’s central bank said Tuesday.
In a speech to the annual conference of the National Association for Business Economics in Denver, Federal Reserve Board Chair Jerome H. (“Jay”) Powell said without a sufficient quantity of reserves in the banking system, even routine increases in funding pressures can lead to outsized movements in money market interest rates. He cited the “unexpectedly intense volatility” last month in wholesale funding markets, particularly those dealing with repurchase agreements.
“Consistent with a decision we made in January, our goal is to provide an ample supply of reserves to ensure that control of the federal funds rate and other short-term interest rates is exercised primarily by setting our administered rates and not through frequent market interventions,” Powell said. “Of course, we will not hesitate to conduct temporary operations if needed to foster trading in the federal funds market at rates within the target range.”
He noted, earlier, that’s precisely what the Fed did in September, conducting temporary open market operations as overnight interest rates spiked and the effective federal funds rate moved – briefly – above the interest rate target range set by the Fed. Powell asserted that action kept the fed funds rate in the target range and “alleviated money market strains more generally.”
Powell indicated that the Fed is ready to do the same again in the future to keep rates within the target range.
In the meantime, he said, the Fed would be taking action on reserve balances – even though that is but one of several items on the liability side of the Fed’s balance sheet. And demand for those liabilities, “notably, currency in transaction,” grows over time, he said. “Hence, increasing the supply of reserves or even maintaining a given level over time requires us to increase the size of our balance sheet,” he added.
“As we indicated in our March statement on balance sheet normalization, 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.”
Chair Jerome H. Powell: Data-Dependent Monetary Policy in an Evolving Economy