US’s Fed Plans to Give More Stimulus to the Market

Federal Reserve left the target range for its federal funds' rate unchanged at 1.5-1.75 percent following its two-day meeting this week and signaled no plans to cut in 2020 - Photo by Federal Reserves Office.

JAKARTA (TheInsiderStories) – United States (US) Federal Reserve soon will announce plans to increase the amount of short-term treasury securities in order to avoid a repeat of last month’ unexpected strains in wholesale funding markets, the chairman Jerome Powell said on Tuesday (10/08).

“That time is now upon us. My colleagues and I will soon announce measures to add to the supply of reserves over time,” Powell said in a speech at the 61st annual meeting of the National Association for Business Economics in Denver, as quoted on the Fed website.

Fed officials stopped shrinking their asset portfolio or balance sheet in August. But they haven’t said when they will allow it to grow again to account for growth in the central bank’s liabilities, such as currency.

As a result, bank deposits held at the Fed, called reserves, have been declining. As those reserves have declined, stresses have appeared in very short-term funding markets, suggesting banks have grown reluctant to lend out of those reserves.

Shortages of funds that banks were willing to lend on Sept. 16 and 17 led interest rates in very short-term lending markets to rise sharply. In response, the Fed injected billions of dollars of cash to pull rates down to their target range.

Rather than purchase longer-dated securities, Powell said officials are now contemplating buying shorter-dated Treasury bills in order to rebuild the level of reserves in the system.

“Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy,” he said.

Reportedly, reserves have declined to US$1.4 trillion in recent weeks, from $2.8 trillion in 2014, as the Fed ended and later reversed its postcrisis stimulus campaigns.

Some Fed officials think the easiest fix to recent funding market pressures would be to build a buffer of reserves $150 billion or $250 billion above mid-September’s low watermark by buying Treasury securities.

Powell provided fewer clues about the central bank’s plans to provide additional interest rate cuts after lowering its benchmark federal-funds rate for a second time in September, to its current range between 1.75 percent and 2 percent.

“The next FOMC meeting is several weeks away, and we will be carefully monitoring incoming information. We will be data-dependent, assessing the outlook and risks to the outlook on a meeting-by-meeting basis,” he said.

“Taking all that into account, we will act as appropriate to support continued growth, a strong job market, and inflation moving back to our symmetric 2 percent objective,” he adds.

Meanwhile, more and more countries are willing to trade in their local currencies as the US administration has increased its use of the dollar as a sanctioning tool against other countries.

Last week, Turkey and Rusia had signed an agreement on using national currencies in payments and settlements between the two countries, the Russian finance ministry said Tuesday. The agreement is aimed at gradually switching to using the ruble and the lira in mutual settlements.

The agreement envisages connecting Turkish banks and companies to the Russian version of the SWIFT payment system while enhancing the infrastructure in Turkey that would allow using the Russian MIR cards, designed by Moscow as an alternative to MasterCard and VISA.

While the central banks of Singapore and Indonesia on Tuesday have agreed to extend a $10 billion bilateral financial arrangement for one year to support monetary stability. The deal, which includes a local currency bilateral swap agreement and a repo agreement, was signed last year.

Furthermore, the European Central Bank (ECB) had lowered one of its key policy rates and restarted its asset purchases, and signaled it could loosen its policy further to ensure inflation rises towards its target amid protracted economic weakness and persistent downside risks.

Last month, the central bank for the 19 counties that share the euro, cut its deposit rate by another 10 basis points to minus 0.50 percent, the first cut since March 2016, but left its benchmark refinancing rate steady at 0.0 percent and the lending rate at 0.25 percent.

The ECB restarted its asset purchase program – known as quantitative easing – and will be buying securities worth 20 billion euros from Nov. 1, with the program to “run as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates,” ECB President Mario Draghi said in his last press conference before handing over the stewardship to Christine Lagarde on Nov. 1 after eight years.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com