Fed's Powell: Recent balance sheet expansion not tied to monetary policy

By Michael S. Derby

(Reuters) -Federal Reserve Chair Jerome Powell said on Wednesday the sharp reversal of the central bank's effort to shrink the size of its balance sheet in the wake of the collapse of Silicon Valley Bank does not mean it is using its holdings to provide renewed stimulus to the economy.

"The balance sheet expansion is really temporary lending to banks” and “it’s not intended to directly alter the stance of monetary policy," Powell said at his press conference following the Federal Open Market Committee meeting.

Last week, a surge of borrowing by banks, most notably via a record $153 billion in lending via the discount window, caused the Fed's overall stockpile of cash and bonds to leap from $8.4 trillion on March 8 to $8.7 trillion as of one week ago. That unraveled months of efforts to reduce the size of the Fed's footprint in bond markets.

The Fed's balance sheet, fueled by aggressive buying of Treasury and mortgage debt as a form of stimulus initiated in the wake of the onset of the coronavirus pandemic, topped out last summer at just shy of $9 trillion.

Since last fall the Fed has been allowing just short of $100 billion per month of bond holdings to expire and not be replaced, allowing its balance sheet to shrink. That effort complemented aggressive rate rises aimed at lowering high levels of inflation.

The Fed raised rates again by a quarter percentage point on Wednesday and signaled that while the banking sector stresses are clouding the outlook, official have penciled in one more 25 basis point increase this year.

It's unclear whether the emergency bank borrowing will stay high or ebb. But in his comments Wednesday Powell said officials are not currently contemplating any changes in the core effort of reducing holdings.

"We haven't really talked about changing the balance sheet implementation," Powell said, although he added "we're always willing to change that if we believe it's appropriate."

Fed holdings surged last week due to record discount window lending to banks and other credit extensions that happened in the wake the collapse of Silicon Valley Bank.

(Reporting by Michael S. Derby, Editing by Franklin Paul and Andrea Ricci)

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