Powell Says Money-Market Turmoil Doesn't Matter for U.S. Economy

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Federal Reserve Chairman Jerome Powell downplayed this week’s turmoil in money markets, saying that the liquidity squeeze had no impact on the economy and the Fed has enough tools to address the problem, as it showed this week.

“While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy,” Powell said Wednesday in prepared remarks at a press conference in Washington, after the Fed cut interest rates for a second straight meeting.

“To counter these pressures, we conducted overnight repurchase operations yesterday and again today,” Powell said. “These temporary operations were effective in relieving funding pressures.”

Interest rates in the market for overnight secured loans -- known as repurchase agreements -- surged this week as large corporate-tax payments came due and a larger-than-expected Treasury issuance drained cash from the financial system. The New York Fed was forced to intervene with an injection of liquidity for the first time in a decade.

The Fed has been slowly draining cash since the beginning of last year by shrinking its bond portfolio. The unwind was halted in July, earlier than scheduled. Powell signaled Wednesday that the Fed could soon return to expanding its balance sheet, a move that many analysts had predicted for next year.

“There is real uncertainty, and it is certainly possible that we will need to resume the organic growth of the balance sheet earlier than we thought," Powell said while answering followup questions. “We’ll be looking at this carefully in coming days, and taking it up at the next meeting.”

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