Fed settles for big balance-sheet future

Posted March 03, 2019

In his report to Congress, Powell repeated assurances the Fed has been making since January that it plans to be patient in deciding the next moves on interest rates.

Former Federal Reserve Chair Janet Yellen says she doubts that President Donald Trump has a good grasp of economic policy or even knows the Federal Reserve's mandates.

The central bank boosted its holdings by more than four-fold in the wake of the 2008 financial crisis and subsequent recession, in an effort to lower long-term interest rates as it looked for unconventional ways to boost economic growth.

At the end of 2018, the Fed's total assets stood at just over $4 trillion, up from under $900 billion at the end of 2007, though down from an early 2015 peak above $4.5 trillion. Powell said Wednesday the balance sheet reduction will likely concluded when bank reserves approach $1 trillion.

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"There is a fear in the market that sentiment has got a bit carried away on the positive side, especially given the experiences we had through October and through December, when we had some really sharp downward corrections", said Nick Twidale, Sydney-based chief operating officer at Rakuten Securities Australia.

While saying the Fed viewed the current economic conditions as healthy and the outlook as favorable, Powell also cautioned "some crosscurrents and conflicting signals" over the past few months in his Tuesday's testimony to the Senate Banking Committee. The US dollar rose to 1.0010 Swiss francs from 0.9990 Swiss franc, and it decreased to 1.3148 Canadian dollars from 1.3167 Canadian dollars. But many private economists believe the central bank may keep rates unchanged all year, reflecting expectations that the economy will slow significantly. "$1,300- $1,400 should be very reasonable price range for this year".

"The economy grew at a strong pace, on balance, last year, and employment and inflation remain close to the Federal Reserve's statutory goals of maximum employment and stable prices", he said. "We're in no rush to make a judgment about changes in policy".

He cited the financial markets becoming more volatile toward year-end, financial conditions proven less supportive of growth than they were earlier a year ago, as well as slowing growth in some major economies. "We will carefully monitor these issues as they evolve".

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"He's made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the US balance of trade", she said.

Powell said the United States faces "important longer-run challenges".

"Big corrections in equity prices - our forecast is that the S&P 500 will end this year about 18 percent below its level now - have often given the US dollar a boost in the past", Higgins said.

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