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New York Fed Lays Out Stimulus (Money-Printing) Plans (#GotBitcoin?)

Central bank’s holdings of assets and bonds could again increase sometime between later this year and 2025. New York Fed Lays Out Stimulus (Money-Printing) Plans (#GotBitcoin?)

The Federal Reserve’s balance sheet, which has recently stopped shrinking, may once again start growing later this year, the Federal Reserve Bank of New York said Tuesday.

The potential expansion of the Fed’s holdings of assets and bonds, which now stand at $3.8 trillion, would be technical, and wouldn’t signal a change in the central bank’s view on the economic outlook.

The New York Fed said the central bank’s holdings could again increase sometime between later this year and 2025, according to an update of its 2018 Open Market Operations annual report.

The Fed’s bond purchases would add to what is called the System Open Market Account.

The Fed’s bond-buying “will have the same purpose as pre-financial-crisis purchases of Treasury securities—expanding the size of the SOMA portfolio to accommodate growth in demand for currency, reserves, and other liabilities,” the bank said.

The New York Fed said there are considerable uncertainties surrounding the management of its holdings, hence the wide range of potential starting dates.

Renewed bond-buying would be another sign that monetary policy is in part returning to how it was done before the financial crisis. While there have been big changes in how the Fed influences short-term rates to accomplish its monetary policy goals, it has long grown its overall holdings via modestly sized and regular purchases of Treasury securities.

The Fed’s bond-buying would likely be announced in advance, and not done unpredictably, as was the practice before the financial crisis.

Before the financial crisis, the Fed’s balance sheet rose slowly and steadily. That pattern changed in 2008 as the Fed slashed its short-term interest rate target to near zero and embarked on what would be several rounds of long-term bond-buying, as a way of providing stimulus to the economy.

Those purchases boosted Fed holdings from just over $800 billion to a peak of $4.5 trillion.

The Fed began to return monetary policy to a more normal footing starting with rate increases at the end of 2015. In 2017, it began taking steps to reduce the size of its balance sheet. It ended that process last month after the central bank lowered rates in late July for the first time in over a decade.

Fed officials have long said that holdings would again grow at some point but they haven’t given a firm timetable.

A technically driven expansion of Fed holdings now stands in the shadows of other issues faced by the Fed. The central bank is broadly expected to press forward with more rate cuts this year as it seeks to provide insurance again trade uncertainty and slower global growth in an otherwise healthy domestic economy.

If the U.S. economy takes a negative turn, the Fed could easily lower rates again to near-zero levels. It would likely then turn to long-term bond-buying as a stimulus tool, and any interventions of that sort would likely dwarf anything that would be done as part of technical adjustments.

The New York Fed’s report also noted that it continues to expect its holdings to remain profitable for the central bank. The Fed funds itself largely from interest income on the bonds it owns, with excess profits returned to the U.S. Treasury.

The annual report also assumes that compared with the Fed’s current target-rate range of between 2% and 2.25%, the federal-funds rate will fall to 1.2% by the second quarter of 2021. The report said the long-run level for the funds rate is expected to be 1.5%.

The Fed’s Tail-Chasing Problem

The Federal Reserve’s current policy reasoning could push rates sharply lower in response to remote risks.

The U.S. economy is probably going to be fine, but the Federal Reserve looks likely to lower rates this week anyway.

There is some sense to that: With all the potential economic threats out there, the Fed worries that staying on hold could be riskier than cutting rates. But the danger is that the Fed is entering a spiral where increasingly remote tail risks will lead it to keep lowering rates until it has next to no rate cuts left to give.

With the unemployment rate near a 50-year low, consumer spending solid and inflation beginning to perk up, it seems incongruous at the moment to cut rates. But trade tensions, a slowing global economy and, now, last weekend’s attack on Saudi Arabian oil facilities, all count as reasons to worry.

Those worries are magnified by the fact that the Fed’s current target range for overnight rates, at 2% to 2.25%, is already quite low. That leaves it with little ammunition if it is confronted by a recession—indeed in the past the central bank has had to cut rates by around 5 percentage points in response to a recession.

As a result, the Fed arguably should be readier than usual to lower rates in response to threats, and stave off the possibility of recession, than it might be otherwise. Or, as Fed Chairman Jerome Powell put it in June, “An ounce of prevention is worth a pound of cure.”

Say there is a one-in-five chance that global problems lead companies to reduce employment in the U.S. or spook consumers into spending less. If overnight rates were now set at 5%, the Fed might be more comfortable waiting to see how the situation develops than it is now.

By this logic, however, as the starting rate goes lower, the Fed needs to get even more aggressive responding to remote but worrying possibilities. If policy makers cut rates at the conclusion of their meeting Wednesday and then cut rates one more time this year, as most economists expect, the Fed’s target range will be 1.5% to 1.75% at the start of 2020.

If the Fed then perceives a one-in-10 danger, should it cut rates in response? Where does it end? Rates could end up slipping toward zero even before an actual downturn materializes.

 

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