Federal Reserve Chairman Jerome Powell has a problem – how to explain that Fed may soon begin to taper its ongoing asset-shedding operations without seemingly preparing for an impending recession.
It was expected that this test would happen at a later stage of the year instead of the conference on Wednesday after the closing of the first Fed’s Fed Policy Year Meeting.
Wall Street’s shortage of reserves, public pressure from investors and the White House and the Fed’s decision to rethink interest rate hikes force the US central bank to recognize the real opportunity to rely on more bonds than originally planned.
Last year, some investors blamed the Fed’s declines in balance sheet for market volatility. They identified this as a side effect of the quantitative easing program. The central bank is approaching the moment when it has to adjust its balance sheet plan, not because of the stable economy, but because of the short-term markets.
Following the gradual rise in interest rates last year, the Fed is waiting to see what will happen to the economic slowdown and market volatility before further tightening up the measures.
If circumstances change, revaluation of monetary policy choices, including the direction of normalization of the balance sheet, will be reassessed. Everything they do from the Fed depends on the available data.
Trader Georgi Bozhidarov