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US Fed’s Powell downplays concerns about cash crunch on financial markets
WASHINGTON, Sept 19, 2019 (BSS/AFP) – US Federal Reserve Chairman Jerome
Powell downplayed concerns in recent days about a cash crunch in US financial
markets, saying the situation says little about the real economy.
Powell said the need to pay quarterly tax payments was a factor, which
prompted the New York Federal Reserve Bank twice this week to inject
liquidity into the short-term funding market.
“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 in a news conference.
Banks borrow regularly in markets to make sure their daily cash reserves
do not fall below the required level. And the Fed adds or removes liquidity
to keep interest rates in line with the desired target.
But a cash shortage in recent days prompted the New York Fed on Tuesday
and Wednesday to pump $128 billion into the short-term market as interest
rates soared and threatened to break out of the Fed’s target range.
Economists pointed to the technical factors that were behind the issue
but said it was concerning that the US economy’s financial plumbing seem to
have a clog.
Powell noted that the deadline for tax payments coincided with a surge in
Treasury debt issues, which drained cash from the financial system
temporarily.
“Our sense is that it surprised market participants a lot too,” Powell
said. “People were writing about this and publishing stories weeks ago. It
was a stronger response than we expected.”
But he said the New York Fed operations “were effective in relieving
funding pressures.”
To help alleviate the issue, the Fed cut the interest rate it pays to
banks on cash reserves above the required level by 30 basis points to 1.8
percent, in a bid to push more cash into markets.
In addition, the central bank lowered the rate it uses on daily overnight
lending to 1.7 percent — below the bottom of the target range for the main
policy rate of 1.75 to 2.0 percent.
Powell said the institution is committed to providing sufficient reserves
to the financial system.
“We’ll continue to monitor market developments and conduct operations as
necessary” to keep the benchmark interest rate in line.
BSS/AFP/HR/0935