Fed chair Powell says balance sheet will grow ‘soon’ after recent market turmoil

Federal Reserve Chairman Jerome Powell spoke at the National Association for Business Economics conference in Denver on Tuesday.
Federal Reserve Chairman Jerome Powell spoke at the National Association for Business Economics conference in Denver on Tuesday.Thomas Peipert/Associated Press/Associated Press

DENVER — Federal Reserve Chairman Jerome H. Powell said Tuesday that the central bank will once again begin expanding its portfolio of government-backed securities and continued to leave the door open to another interest rate cut later this month.

While “policy is not on a preset course,” Powell said the Fed will “act as appropriate to support continued growth.”

Powell, in a speech prepared for delivery at an economics conference in Denver, emphasized that the Fed’s next meeting is several weeks away. He said officials are monitoring weaker global growth and uncertainties arising from trade tensions and Britain’s negotiations to leave the European Union.


While he demurred on whether the Fed will cut interest rates for a third time since July, he offered the clearest signal yet that the Fed will soon begin to buy government-backed bonds to expand its balance sheet.

But Powell emphasized that the coming move is not equivalent to the massive bond-buying campaign that the Fed undertook during the Great Recession. That effort, known as quantitative easing, was meant to boost the economy at a difficult moment. The Fed’s effort now would be aimed largely at avoiding the type of volatility that took place in mid-September when a shortage of dollars in an obscure part of the financial market pushed interest rates above the Fed’s benchmark rate above its intended range.

The central bank has been saying for months that it would eventually need to expand its bond holdings again to keep an ample supply of banking reserves — currency deposits at the Fed — in the financial system.

“That time is now upon us,” Powell said. He added that the Fed “will soon announce measures to add to the supply of reserves over time.”

Powell’s speech underscores the challenging juncture facing the central bank, from both a policy-setting and a communications standpoint. Officials want to make sure that monetary policy is appropriately set to insulate the economy from any potential shocks. But they are trying to gauge whether that requires future policy adjustments at a time when domestic economic data are generally holding up and the consumer appears resilient.


Policymakers must also explain why they are resuming balance sheet expansion after stopping their efforts to shrink their holdings in August, a move that came earlier than originally planned. Officials are trying to make clear that the change is purely technical — meant to keep money markets functioning smoothly and the Fed’s policy interest rate at the right level — but not an attempt to stoke the economy.

Trump’s regular criticism of the central bank risks further clouding the message. The president has spent months calling for interest rate cuts and an end to balance sheet shrinking. While the Fed operates independently of the White House and officials say that their moves are based on economic developments and not politics, there is a risk that some onlookers will believe the central bank has capitulated to Trump.

The Fed has cut interest rates twice since July as trade uncertainty weighs on business investment and a global manufacturing slowdown hits US factories. While officials often repeat that the US economy is solid, changes to interest rates take a while to filter though the economy. Policymakers set them with an eye toward how future growth appears to be shaping up — not just how the data look today.


Risks to that outlook have been running high. Germany’s economy seems to be on the brink of a recession, and China’s economy is slowing. While Chinese trade negotiators are in Washington this week, it remains unclear whether a comprehensive resolution to the trade war can be reached. Britain’s negotiations to exit the European Union are reportedly on shaky ground.

Signs are also mounting that the US economy may be slowing. Job gains have cooled off, and wage growth seems to have plateaued. Indexes gauging both manufacturing and services have weakened. Despite that, Powell painted an optimistic picture of the current state of the economy Tuesday.

“At present, the jobs and inflation pictures are favorable,” he said. “Many indicators show a historically strong labor market, with solid job gains, the unemployment rate at half-century lows, and rising prime-age labor force participation.”

Still, he added, “there are risks to this favorable outlook, principally from global developments.”