Powell says Fed will start increasing its balance sheet 'soon'

Federal Reserve Chairman Jerome Powell said the U.S. central bank is prepared to expand the size of its balance sheet, a response to a spike in short-term funding costs.

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"This volatility can impede the effective implementation of monetary policy, and we are addressing it," Powell said during a speech in Denver on Tuesday. "Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time."

In 2017, the Fed began to shrink its $4.5 trillion holdings of bonds and other assets, known as its balance sheet, which was expanded during the financial crisis and used to pump banks with money bought as bonds. With an unprecedented amount of holdings, the Fed was able to push down long-interest interest rates.

The central bank generally maintains the size of its portfolio by reinvesting the proceeds from its assets; in order to shrink it, they began to gradually taper that process. They believed it could shrink the portfolio to anywhere between $1.5 trillion and $3 trillion and indicated the process could take several years.

But in January, policymakers decided to end the runoff, though it was a decision more driven by a technical debate about reserve in the banking system, not about whether officials wanted to provide more or less stimulus to the economy.

Powell stressed again on Tuesday the decision to increase the balance sheet was not quantitative easing, which previously took the balance sheet to $4.5 trillion.

"Our goal is to provide an ample supply of reserves to ensure that control of the federal funds rate and other short-term interest rates is exercised primarily by setting our administered rates and not through frequent market interventions," he said.

The decision is likely to placate President Trump, who frequently urges the Fed to stop what he refers to as "quantitative tightening."