Federal Reserve Chairman Jerome Powell on Wednesday said the US central bank may need to increase the size of its balance sheet to relieve stress in the overnight lending market.
“It is certainly possible we will need to resume the organic growth of the balance sheet sooner than we thought,” Powell told reporters during a press conference.
After overnight lending rates spiked this week, the New York Federal Reserve pumped $128 billion into the market on Tuesday and Wednesday.
Wall Street firms have been predicting the Fed will need to take a further step by increasing the size of the balance sheet. In other words, the Fed will need to start buying bonds again.
“We’ll call it QE-lite,” said Jim Bianco, CEO of Bianco Research, referring to the Fed’s crisis-era bond buying program known as quantitative easing. “Functionally it looks exactly the same, but they are doing it for a different reason: To provide liquidity.”
UBS notes that the Fed's balance sheet always grew prior to the crisis, in line with the growth of currency. The firm expected it would happen again, just not until early 2020.
The spike in overnight lending rates this week shows the Fed may have underestimated how much cash is needed to keep the financial system operating smoothly.
Powell acknowledged there is “real uncertainty” around this question and said the Fed will “learn quite a lot in the next six weeks” about the appropriate level of reserves.