Fed’s Bank Leverage Decision May Start Taper Countdown
The central bank won’t extend its Covid-19 capital break in what could be a signal that it won’t buy $120 billion of bonds a month indefinitely.
Jerome Powell needs to see the proof.
Photographer: Susan Walsh/AFP/Getty Images
After investors spent weeks brushing up on the specifics of the Federal Reserve’s Covid-19 era changes to the supplementary leverage ratio, the central bank ultimately decided it was best to just let those exemptions expire as intended on March 31.
The Fed and other regulators announced Friday that they wouldn’t extend an emergency move that temporarily allowed banks to exclude U.S. Treasuries and reserves at the central bank from the SLR denominator. All else equal, this reduces banks’ capacity to own Treasuries because they would have to put up more capital to do so, given the SLR doesn’t factor in the risk level of assets. “The Treasury market has stabilized,” the central bank said in its own statement. “However, because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability.”