WASHINGTON (AP) – Federal Reserve Chairman Jerome Powell said on Friday that the healthy US economy and low inflation are allowing the central bank to take a “patient, wait-and-see approach” on interest rates.
Speaking at Stanford University, Powell said the Fed is well along in its effort to normalise Fed operations by scaling back the extraordinary efforts it employed to support the economy’s recovery from the Great Recession.
The Fed is trimming its sizable holdings of Treasury bonds and mortgage-backed securities.
Officials are discussing a plan for wrapping up the efforts to reduce the central bank’s balance sheet later this year, Powell said, adding that the plan’s details should be announced soon.
The Fed’s moves to reduce its balance sheet, which hit a peak of USD4.5 trillion, are being watched closely by investors.
The Fed started in October 2017 reducing the balance sheet by allowing some bonds to run off as they matured. The balance sheet is now around USD4 trillion, but some investors have worried that the Fed could end up driving long-term interest rates higher and harming the economy by going too far in reducing its holdings.
Some analysts have projected the Fed’s balance sheet will end up being around USD3.5 trillion, which would be significantly higher than the less than USD1 trillion it held before the financial crisis hit in 2008.
Powell said the size of the holdings will “prove ample” to meet the Fed’s needs of supplying reserves to the banking system. He said “we could be near that level later this year”.
“As we feel our way cautiously to this goal, we will move transparently and predictably in order to minimise needless market disruption,” Powell said.
The Fed is conducting a yearlong review of its procedures as part of its effort to update its operations in areas such as the way it communicates with the public, Powell said.
One area being examined is whether the Fed should consider altering its inflation target, which is currently a goal of annual price increases of two per cent, to allow inflation to go above that goal for a time.
During a question and answer session, Powell said that the yearlong review of Fed policy would cover the unconventional tools the Fed used to bolster the economy such as bond purchases but also look at tools the Fed decided not to use such as the use of negative interest rates to provide more stimuli to the economy.
“This is the first time we have done this,” Powell said of the yearlong review, which will include town-hall-style meetings and an academic conference. “We are looking at a wide range of things.”