Credit & Capital

Fed to Buy Treasuries to Ease Funding Strains

The Fed's move to grow its balance sheet comes after last month's “unexpectedly intense volatility” in the funding markets.
Matthew HellerOctober 9, 2019

The Federal Reserve is planning further measures, including Treasury bill purchases, to address the recent “unexpectedly intense volatility” in the funding markets, Chairman Jerome Powell said Tuesday.

During last month’s turmoil in the markets, the Fed conducted its first repurchase operations since the Great Recession after a lack of liquidity caused repo rates to spike as high as 10% and the Fed’s benchmark federal funds rate to go above its targeted range by 5 basis points.

In a speech in Denver on Tuesday, Powell said those operations “kept the federal funds rate in the target range and alleviated money market strains more generally” but it was “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.”

As a result, he said, the Fed will soon announce measures “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 indicated the central bank was considering purchasing Treasury bills as a way of “increasing our securities holdings to maintain an appropriate level of reserves.”

The Fed’s balance sheet, consisting largely of its holdings of Treasuries and mortgage-backed securities, peaked at about $4.25 trillion in 2015 and 2016 before the Fed began shrinking it as the economy improved. It stood at about $3.7 trillion on Sept. 11.

In September, Powell acknowledged that it was “certainly possible that we will need to resume the organic growth of the balance sheet earlier than we thought.”

The chairman didn’t specify how many bonds the Fed would buy and how quickly it would do so, but he said the Fed was close to finalizing and announcing its plans. He also distinguished its moves to increase reserves from quantitative easing.

“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,” Powell said.

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