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On Tuesday, Federal Reserve Chairman Powell said he was open to further interest rate cuts at a time of risk to the global economy. He pointed out that the time for the Fed to expand its balance sheet again to ensure the smooth operation of the money market "now depends on us".
DATA PICTURE: On September 6, 2019, in Zurich, Switzerland, Federal Reserve Chairman Powell spoke at a seminar on "Economic Prospects and Monetary Policy" held by the University of Zurich. REUTERS/Arnd Wiegmann
Powell did not commit to further interest rate cuts, but pointed out that recent data revisions showed that annual employment growth as of March was lower than previously estimated, turning a "booming" market into a moderately growing one. Other recent economic data, including a possible contraction in manufacturing, have heightened the sense of economic slowdown.
"Powell seems to be trying to show the market in a soft way that the Fed continues to focus on downside risks and is willing to actively support economic growth when necessary," said Jason Ware, chief investment officer of Albion Financial Group.
Recent shocks in the U.S. short-term financing market have raised concerns that the Federal Reserve has shrunk its balance sheet too small, resulting in insufficient bank reserves to cope with occasional short-term high demand.
Powell said the Fed would "soon announce measures to gradually increase the supply of reserves".
In recent months, the Federal Reserve has been scaling back its balance sheet to withdraw from its bond purchases during the crisis. Powell said the fact that the Federal Reserve would start expanding its balance sheet again should not be interpreted as an effort to stimulate the economy, but rather to meet the public's demand for liquidity, bank readiness, and other core functions of the Federal Reserve.
The market has been watching to see what kind of permanent policy the Federal Reserve will adopt to avoid the recent disruption of short-term capital supply. At that time, the shortage of reserves caused the Federal Fund Rate to rise above the Fed's current target range of interest rates - a situation that, once normal in financial markets, could disrupt the Fed's monetary policy objectives.
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