The Fed’s own policy approach probably contributed to the September issues. The central bank had been gradually shrinking its portfolio of government-backed bonds — swollen by post-recession stimulus programs — until late this summer, draining money from the financial system in the process. As of October, it began to buy Treasury bills again to ensure that there are enough cash holdings at the Fed, or reserves, to keep markets well supplied.
For now, Fed officials will probably signal that they are ready to act to keep money markets under control headed into the end of the year, when banks tend to hoard their reserves for regulatory reasons, potentially pushing repo rates up again.
“I would expect them to effectively say that we’re going to do whatever it takes to make sure that year-end goes smoothly,” said Michael Feroli, chief United States economist at J.P. Morgan.
Political dynamics are also likely to be a consideration heading into 2020, even if Mr. Powell and his colleagues would prefer not to talk about them.
Mr. Trump has regularly pressured the central bank to ease monetary policy more aggressively, calling for negative interest rates and labeling Mr. Powell both an “enemy” and a bad golfer over the last 12 months.
The central bank, which is independent of the White House but answers to Congress, has done its best to stay out of the fray. But it could remain in Mr. Trump’s sights as he returns to campaigning, given that he regularly criticized the Fed while on the 2016 campaign trail.
“They’d really love to stay on the sidelines — and stay out of the news — in an election year,” Ms. Swonk said. But if trade conflicts or other risks threaten the economy, the Fed will need to stand ready to move again, political cycle notwithstanding.
“The biggest challenge is to stay on the sidelines,” she said, “but to also know when that won’t be right.”
Article source: https://www.nytimes.com/2019/12/11/business/economy/fed-rates.html?emc=rss&partner=rss
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