Federal Reserve’s Powell sees a ways to go on shrinking Fed holdings

NEW YORK: Over two days of testimony this week before Congress, Federal Reserve Chairman Jerome Powell indicated there’s no imminent end to the central bank’s balance sheet wind-down process, as some banks have moved to push back their own end date for a process commonly referred to as quantitative tightening.

“I think we have a ways to go” on reducing the size of central bank bond holdings and there are no signs yet that market liquidity has shrunk enough to affect the Fed’s reduction in holdings of Treasury and mortgage bonds, Powell told a House panel Wednesday (Feb 12).

Powell’s observations on quantitative tightening, or QT, comes as the Fed has shed just over US$2 trillion from its holdings. The Fed is seeking to extinguish liquidity it added to markets during the COVID-19 pandemic when it bought trillions in bonds to stabilise markets and goose economic growth by lowering longer-term borrowing costs.

Since the Fed began QT it has been seeking to reduce overall market liquidity, most clearly measured in the level of bank reserves, to levels that allow for normal levels of money market interest rate volatility, while allowing the Fed firm control over the federal funds rate, its main tool to influence the momentum of the economy.