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Powell signals Treasuries buying to support continued growth

Fed chairman also keeps door open to another possible rate cut in October


THE Federal Reserve chair, Jerome Powell, said on Tuesday that the central bank would again begin expanding its portfolio of government-backed securities and continue to leave the door open to another interest rate cut this month.

While "policy is not on a preset course," Mr Powell said, the Fed will "act as appropriate to support continued growth". Mr Powell, speaking at an economics conference in Denver, emphasised that the Fed's next meeting was a few weeks away. He said officials were 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 buy Treasury securities to expand its balance sheet.

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

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"That time is now upon us," Mr Powell said. He added that the Fed "will soon announce measures to add to the supply of reserves over time." Last month, an obscure but important corner of financial markets - overnight repurchase agreements made between banks and other financial institutions - saw a spike in interest rates that spilled into other money market rates. It even briefly pushed the Federal funds rate, the Fed's main policy tool, above its range. The episode prompted the Federal Reserve Bank of New York to jump into the market to smooth things over for the first time since the financial crisis. Many market observers have said that might not have been necessary had the central bank kept a bigger balance sheet. By shrinking its asset holdings, the Fed also drained bank reserves from the financial system.

While several factors could have contributed to the episode, "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," Mr Powell said in his remarks.

But Mr Powell emphasised that the coming move is not equivalent to the large bond-buying campaign that the Fed undertook during the Great Recession. That effort, known as quantitative easing (QE), was meant to lift 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.

"This is not QE," Mr Powell said, repeatedly, in a question-and-answer session after the speech. Mr Powell's remarks underscore the challenge 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 is 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. 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 - and not an attempt to stoke the economy.

President Donald Trump's continual criticisms of the central bank risks further clouding that 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 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 Mr Trump. NYTIMES

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