At the Economic Club of Chicago, Federal Reserve Chair Jerome Powell explained why there will not be a "Fed put" for the stock market.
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00:00Well, let me turn to financial markets.
00:03We've seen some volatility, especially stock market volatility.
00:09I mean, the levels of the VIX are up to the levels they were in the early days of the pandemic, coming off somewhat now.
00:18Some people believe the Fed will intervene if the stock market plummets, the so-called Fed put.
00:24Are they correct?
00:25I'm going to say no with an explanation.
00:33So what I think is going on in markets is markets are processing what's going on.
00:43And, you know, it's really the policies, particularly the trade policy.
00:48And really the question is, where is that going to come in?
00:51Where is that going to land?
00:52And we don't know that yet.
00:53And until we know that, you can't really make informed assessments that would still be highly uncertain.
00:59Once you know what the policies are, it will still be highly uncertain what the economic effects will be.
01:03So markets are struggling with a lot of uncertainty.
01:06And that means volatility.
01:08But having said that, markets are functioning.
01:11You know, conditional on being in such a challenging situation, markets are doing what they're supposed to do.
01:16They're orderly and they're functioning just about as you would expect them to function.
01:23So we've seen volatility also in the bond market.
01:27And at a time when usually there's a traditional, there's a flight to safety, we saw yields on the German bond and the Japanese government bond come down.
01:38But we saw yields on U.S. Treasuries go up.
01:42What do you attribute this to?
01:43So I would just say the same thing.
01:47I think it's very hard to know in real time.
01:50I've had a lot of experience with significant moves, for example, in the bond market where there's a narrative that people land on.
01:57And then two months later, you look back and go, that was completely wrong.
01:59So I think it's very premature to say exactly what's going on.
02:03Clearly, there's some delevering going on among hedge funds in levered trades and things like that.
02:09It's also, again, it's the markets processing historically unique developments with great uncertainty.
02:17And I think you'll see, you'll probably see continued volatility.
02:20But I wouldn't try to be definitive about exactly what's causing that.
02:25I would just say markets are orderly and they're functioning kind of as you would expect them to in this time of high uncertainty.
02:31So the Fed, in its last meeting, slowed the pace of shrinking of its balance sheet.
02:40Was this driven by uncertainty about how much reserves and liquidity the market needed and you wanted to take a little more time to find that out?
02:49And flip side, you said the market was orderly.
02:53What if market disruptions emerge?
02:58Would the Fed intervene?
02:59So the – we think that reserves are still abundant.
03:05So we don't think we're close to the point, particularly close to the point, where we would stop.
03:11But we were facing a situation in which, for other reasons, there were going to be big flows into and out of reserves.
03:19It had to do with the debt ceiling and the Treasury general account.
03:24For those of you who are Treasury market people, that will make sense.
03:26But we – while that – those big flows are happening for over a period of six months, we would actually be shielded from being able to see evidence that we were or were not getting close to the level of less abundant reserves.
03:41And so we decided to slow the pace.
03:42We thought about pausing and instead we debated – it was one of these great debates that we have at the FOMC.
03:47We decided to slow the pace instead.
03:50And people really came to see the merits of that because, you know, the slower we go, the less – the smaller the balance sheet can get without disruptions.
03:59And, you know, we want that process to continue.
04:02And now it's at quite a slow pace.
04:03So we think that's a really good thing.
04:05So that means it can go on for a longer amount of time and we'll be able to reach kind of very carefully what we think is the right level of reserves, still plenty of reserves.
04:17What about the international dollar-based system?
04:22With all these disruptions, do you stand ready to supply dollars to central banks as you've done in the past when there's been a global shortage of dollars?
04:32Sure, absolutely we do.
04:34Just for everyone's knowledge, we have standing dollar swap lines with five large central banks.
04:41And they go to the jurisdictions where there are big overseas dollar funding markets.
04:47And, in effect, those are overseas markets where, for example, a European or Asian institution is buying an asset-backed security that is backed by loans to American consumers.
04:59So, in effect, these are loans to American consumers.
05:03And we support that.
05:04We want to make sure that dollars are available.
05:06They need dollar funding to hold those dollar assets.
05:09So the way it works is when needed, we lend to the central bank in dollars and they pay us back in dollars.
05:15They then pay in their currency.
05:17They lend on in dollars.
05:20And so we take no credit risk or anything like that.
05:22And it supports dollar funding markets.
05:25Dollar funding markets are very sensitive during times of crisis, and it's very helpful.
05:30The reason we do it is it's really good for U.S. consumers.
05:34So we'll continue to do that, just as part of the dollar being a reserve currency, the reserve currency most important.
05:39And, um...