The Fed will stop reducing its portfolio this year, says Powell

WASHINGTON (Reuters) – The US Federal Reserve will stop tightening its balance sheet by $ 4 trillion later this year, Fed Chairman Jerome Powell announced Wednesday, ending a process that thwarted the Fed's current pause. on rising interest rates.

"We have developed, I think, the framework for a plan that we hope to be able to announce in the near future and that will provide guidance until the end of balance sheet normalization," Powell told committee members. financial services of the House. in what were his most detailed remarks to date on the subject.

"We will be able (…) to stop the runoff later this year," he said, adding that this would leave the balance sheet at around 16% or 17% of GDP, compared with around 6% before financial crisis about a decade ago.

US GDP is currently around $ 20 trillion, suggesting that the Fed's balance sheet is between $ 3.2 trillion and $ 3.4 trillion.

The Fed eased its balance sheet, boosted by billions of dollars in bond purchases in the post-crisis years, to keep interest rates low and support the economy, up to $ 50 billion dollars a month since October 2017. like a few months ago, he planned to further reduce his portfolio for a few more years.

But in a series of meetings that began in November, the Fed has come up with a new approach. Faced with the growing demand for foreign currency in the world and the reserve reserves held by US banks in the central bank, Fed policymakers now estimate that a large balance sheet is needed to ensure adequate control of interest rates at the central bank. short-term targets for debt management. economy.

In addition, Fed policymakers felt that the balance sheet policy should take into account financial and economic conditions.

Questions remain about the plan, including whether the Fed will adjust the maturities of its cash portfolio and how to get rid of the mortgage-backed securities it has accumulated during its days of purchase. 39; assets.

Powell said the Fed still had many decisions to make.

"The one on MBS sales is really closer to the bottom of the line – we really have to decide the composition of deadlines, etc., and we will work on that very cautiously," said Powell. "Markets are sensitive to that."

Powell's remarks on the record ended at the end of more than two hours of testimony before the Democrat-led House panel, which includes several newly elected members, including New York Democrat Alexandria Ocasio-Cortez.

But the Green New Deal defender and the Bronx populist did not ask any questions during the debate. Much of Powell's Wednesday statements were repeated before the Republican-controlled Senate banking committee, notably on the fact that the economy is strong and the patient Fed on rate hikes.

As he was in the Senate, Powell was asked about the Fed's plan to rethink its policy framework this year. He assured lawmakers that the Fed was simply trying to refine its approach in order to achieve its current 2% inflation target.

"We are not aiming for a higher inflation target, it is an end point," he said.

Powell also reiterated his warnings against a congressional failure to raise the debt ceiling, saying that there would be "bad consequences" if the US missed their debt payments.

Powell appears before the Congress twice a year before Congress to brief members of the House Financial Services Committee and the Senate Banking Committee on monetary policy and the state of the economy.