Powell Put? Fed Chief Says Market Volatility Can Affect Economy

(Bloomberg) -- Federal Reserve Chairman Jerome Powell, asked if there’s a “Powell Put” in financial markets, said the U.S. central bank will pay attention to financial-market volatility if it threatens economic stability.

Patrick McHenry, the ranking Republican on the House Financial Services Committee, asked the chairman during a hearing Wednesday to respond to claims that there is a “Powell Put,’’ meaning the Fed will change the course of interest rates in response to volatility -- in effect underwriting risk-taking.

Powell said anything that impacts the Fed’s mandate of maximum employment and stable prices matters, and noted that the central bank’s “tools work through financial conditions.’’

When there are sustained changes “in broader financial conditions, that matters for the macroeconomy, it matters for the achievement of the dual mandate,” and the Fed will take those into account, Powell said.

Fed officials stepped back from their plan to raise interest rates twice this year following a steep drop in stocks after their December policy meeting.

Balance Sheet

Powell was also asked about the eventual size of the Fed’s balance sheet, which it is now in the process of shrinking from crisis-era levels.

Powell explained that before the global financial crisis, the balance sheet averaged about 6 percent of gross domestic product. But higher demand for cash and bank reserves means the normal level of the balance sheet will now be higher. The Fed’s assets currently stand at about $4 trillion.

“There is a lot of uncertainty around the actual level,” Powell said when McHenry asked about where the size of the balance sheet will eventually settle.

“We are close to agreeing on a plan that would sort of light the way to the end of the process,” Powell said. “My guess is we will be announcing something fairly soon.”

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