Pro Perspectives 10/8/19

October 8, 2019

Jay Powell had a prepared speech and Q&A session at the National Association for Business Economics conference today. 

As we discussed yesterday, this was important to watch — to see if the Fed chair might bring up the balance sheet (i.e. signal another round of QE). 

Remember, not only is the ECB is back in the QE business, with plans to restart QE in November, but the Fed has already quietly been expanding its balance sheet.  

Here's another look at the about-face by the Fed …  

So, we were looking for some discussion on the balance sheet. 

And we got it. 

In his prepared remarks today, Powell said that the "time is now upon us" to expand the balance sheet.  Big news?

Powell downplayed it, saying it's "not QE."  Not QE?

Let’s compare …
The Fed expanded the balance sheet for the better part of six years, as a primary tool in manufacturing an economic recovery.  It promoted stability in the financial system, which promoted confidence, which promoted economic activity. 
After spending eighteen months shrinking the balance sheet, the Fed choked off the hottest growth we've seen in a decade (producing the opposite outcome of QE). 

Now they are now back to expanding the balance sheet — and it's aggressive.  The Fed has injected nearly $200 billion dollars of liquidity into the financial system in the past five weeks.  It’s probably safe to say, the Fed expects their new "balance sheet expansion" to produce the same outcomes as their multiple rounds of QE:  promote stability in the financial system, which promotes confidence, which promotes economic activity.