Powell Says Fed Does Its Job Despite Political Scrutiny (Full)

Core Insights - The Federal Reserve's balance sheet plays a crucial role in monetary policy, especially during economic crises, as demonstrated during the COVID-19 pandemic [4][10][37] - The Fed's balance sheet totaled $6.5 trillion as of October 8, with significant components being Federal Reserve notes, reserves, and the Treasury General Account [6][8] - The Fed's asset purchases during the pandemic amounted to $4.6 trillion, aimed at stabilizing financial markets and supporting economic recovery [17][12][15] Balance Sheet Overview - The liability side of the Fed's balance sheet includes $2.4 trillion in physical currency, $3 trillion in reserves, and approximately $800 billion in the Treasury General Account [6][8] - The asset side consists mainly of $4.2 trillion in U.S. Treasury securities and $2.1 trillion in government-backed mortgage securities [9][30] - The Fed's balance sheet serves as a policy tool when the policy rate is constrained, allowing for large-scale asset purchases to support credit flow [10][12][37] Economic Response to COVID-19 - In response to the pandemic, the Fed established emergency liquidity facilities, providing over $200 billion in loans to restore market confidence [11][10] - Large-scale purchases of Treasury and agency securities were implemented to address market dysfunction, with purchases peaking at $120 billion per month by June 2020 [12][14][15] - The Fed maintained asset purchases until substantial progress was made towards employment and price stability goals, concluding purchases by March 2022 [15][16] Current Economic Outlook - The economic outlook indicates that employment and inflation conditions have not significantly changed since the last meeting, with a firm trajectory in economic activity [39][40] - Core PCE inflation was reported at 2.9% in August, with rising inflation expectations and potential risks to employment [41][42] - The Fed is closely monitoring indicators to inform decisions on the balance sheet and monetary policy, with a cautious approach to avoid market strains [28][29] Future Considerations - The Fed's ample reserves regime has proven effective in controlling policy rates and promoting financial stability, with plans to normalize the balance sheet gradually [25][27] - The composition of the Fed's securities portfolio will be discussed, aiming for a long-term focus on Treasury securities [30][31] - The Fed's ability to conduct monetary policy remains intact despite recent negative net income, as interest income from Treasury securities typically covers interest paid on reserves [32][34]