Powell Says Fed Has ‘Ways to Go’ on Shrinking Asset Portfolio

(Bloomberg) -- Federal Reserve Chair Jerome Powell told lawmakers that policymakers have more work to do on trimming their balance sheet.

“We’ve made quite a lot of progress. We think we have a good ways to go,” the Fed chief said Wednesday, his second day of congressional testimony in Washington.

The US central bank has reduced its holdings by about $1.7 trillion so far and officials expect to shrink the balance sheet substantially more, continuing to offload holdings that ballooned as the Fed snapped up Treasury securities and mortgage-backed securities to stabilize markets and support the economy during the pandemic.

The Fed in June slowed the pace at which it is letting bonds run off its balance sheet, a move Powell said will allow officials to move more carefully as they work to prevent their bond holdings from falling too low. Policymakers want to avoid a repeat of 2019 when a shortage of reserves led to a spike in short-term borrowing costs. 

“Going a little bit slower might actually enable us to go further,” Powell said in testimony before the House Financial Services Committee.

More Data

Powell reiterated Wednesday recent price readings have shown “modest further progress,” and “more good data” would strengthen the central bank’s confidence that inflation was returning to its 2% target.

The Fed chair has avoided giving any strong signals on interest rates, though he has emphasized policymakers face risks from both moving too quickly or too slowly to take action.

Powell’s remarks to Congress suggest the Federal Open Market Committee is unlikely to reduce rates when it meets on July 30-31. The Fed has held its policy rate in a range of 5.25% to 5.5%, a more than two-decade high, for nearly a year.

Bank Rules

Powell also reiterated comments he made to the Senate Banking Committee on Tuesday that regulators are close to agreeing to change their plan to force big banks to hold significantly more capital — a move that could mark a major win for Wall Street banks. 

He said a revamped version of their proposal, which could have forced the biggest US lenders to hold as much as 19% more capital to buffer against losses, is undergoing discussions with other banking agencies and will be issued very soon. He added that not all parts of the plan will be republished for comment.

Asked whether the Fed is a leader among equals, he said the conversations between the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have been “strictly collaborative” and “very productive” thus far, despite a lack of agreement on the path forward with the Fed’s Michael Barr, who is seen as the architect of the plan.

“Banks will have to live with the changes for long time,” Powell said of the eventual final rule.

September Clues

Markets are focused on whether officials will provide more clues after the July gathering about a possible rate cut in September.

While the labor market has held up under pressure from higher interest rates, an uptick in the unemployment rate has added political pressure on Fed officials to start reducing borrowing costs.

The Fed’s preferred inflation measure rose 2.6% in the 12 months through May, down from 7.1% in June 2022. While unemployment remains low at 4.1%, it has ticked up in each of the last three months. 

(Updates with Powell’s comments on proposed bank rules starting in ninth paragraph.)

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