US Fed still has ‘a ways to go’ to cut balance sheet, says chairman Powell

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WASHINGTON – The Federal Reserve has “quite a ways to go” in trimming the size of its balance sheet, with the endpoint of quantitative tightening still uncertain, Fed chairman Jerome Powell told the House Financial Services Committee on July 10.

The Fed has trimmed the size of its holding by about US$1.7 trillion (S$2.3 trillion) already, Mr Powell said, but will edge its way carefully to a stopping point in order to make sure financial institutions have access to adequate reserves.

“We have made quite a lot of progress,” Mr Powell said, but “we feel we have quite a ways to go”.

The Fed bulked up its balance sheet in response to the Covid-19 pandemic to help suppress long-term interest rates and support the economy. It is currently letting as much as US$25 billion per month of its holdings of US Treasuries and US$35 billion of mortgage backed securities expire as they mature.

It was Mr Powell’s second day of testimony before the US Congress, a semi-annual exercise that includes a review of economic conditions and monetary policy and, typically, a grilling by lawmakers about regulatory and other issues as well.

Mr Powell’s comments to the Senate Banking Committee on July 9 showed both increased faith in a continued decline in inflation and a growing sensitivity about the risk of keeping monetary policy too tight for too long and slowing the economy more than necessary.

The US unemployment rate is now 4.1 per cent, a number Mr Powell considers low by historical standards but which has been rising incrementally for a year. It is also above the level many economists and Fed officials feel represents sustainable full employment.

Mr Powell told senators that “more good data” would build the case for the US central bank to lower its benchmark interest rate from the 5.25 per cent to 5.5 per cent rate set in July 2023. REUTERS