Powell sees cooler US hiring in possible hint of rate cuts

  • Powell sees cooler US hiring in possible hint of rate cuts

Powell sees cooler US hiring in possible hint of rate cuts

Powell said the Fed is settling into an "ample reserves" regime and now sees that it is around the level banks need.

Federal Reserve Chairman Jay Powell said Tuesday the central bank would increase purchases of government-backed securities over time.

He suggested that the purchases would be made up of Treasury bills and stressed that the buying should not be seen as a return of the crisis-era quantitative easing programs that the Fed engaged in a decade ago to boost the economy. The fact that it will begin growing again should not be read as an effort to stimulate the economy, Powell said, but rather to meet the public's demand for cash, bank demand for reserves and to carry out other core Fed functions.

"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 pressures can lead to outsized movements in money market interest rates", Powell said.

Traders of short-term interest-rate futures are now pricing in more than an 80% chance of a third interest rate cut this year when the Fed next meets, October 29-30.

Reserves dropped to less than $1.4 trillion last month, from $2.8 trillion in 2014, when the Fed stopped buying assets, with most of the decline occurring over the last two years after the Fed pared its asset holdings by allowing some bonds to mature without replacing them. Futures were little changed after the release of Powell's comments. Still, US-China trade tensions loomed large - the US is imposing visa bans on Chinese officials linked to China issued a strong statement about the US move on the latest blacklist additions and Bloomberg also reported the US administration is moving ahead on discussions to restrict capital flows to China, the report added. "The next FOMC meeting is several weeks away, and we will be carefully monitoring incoming information".

While the jobs and inflation picture for the USA economy has been favorable, Mr. Powell said global developments pose risks to this outlook, including from trade policy uncertainty and Britain's impending departure from the European Union.

The economy has recently shown signs of slowing as weakness overseas has spread to the United States and moved from domestic manufacturing industries to services.

Powell said the Fed is about to embark on more permanent operations to make sure the system has enough reserves and the market volatility events are controlled. Corporate tax payments due at the end of the quarter and bond sales by the federal government had soaked up so much cash as to send the overnight rates sharply higher.

Recent volatility in USA short-term funding markets raised concern that the Fed had allowed its balance sheet to become too small, leaving banks with an inadequate supply of reserves to manage occasional periods of high demand. But he said the central bank "will act as appropriate" to support the economy and hiring. "That time is now upon us".