The Wall Street Journal - 07.10.2019

whichinclude currency, re-

serves and the Treasury’s fi-

nancing account. The Fed

shifted the supply of |reserves

up and down in incremental

amounts to adjust short-

term rates.

The crisis changed every-

thing. With the banking sys-

tem awash with reserves, the

Fed devised new tools to con-

trol interest rates. It started

paying interest on these re-

serves directly to banks, rais-

ing or lowering the interest

rate on reserves to change the

interest rates banks charged

each other.

Later, the Fed wanted to

demonstrate that its crisis-era

stimulus could be withdrawn

and began shrinking the bal-

ance sheet two years ago. Of-

ficials stopped the process

this past summer and are

now holding its portfolio

steady at $3.9 trillion.

T

heFed now has to de-

cide when to allow the

balance sheet to start

growing again to keep up

with demand for the central

bank’s liabilities. Officials

knew that eventually, reserves

would reach a level low

enough that banks would

charge more to lend to each

other in overnight markets,

but didn’t think they would

hit that point this soon.

The Fed will study whether

postcrisis financial rules or

informal guidance from regu-

lators changed banks’ behav-

ior in a way that amplified re-

cent market stress.

Fed Chairman Jerome Pow-

ell said last month that offi-

cials would consider resuming

THEOUTLOOK|By Nick Timiraos

Fed Looks Anew at Its Balance Sheet

The Federal

Reserve fixed

the recent

dysfunction in

an obscure but

critical lending

market. Now it has to decide

how to prevent these prob-

lems from recurring.

Shortages of funds that

banks were willing to lend on

Sept. 16 and 17 led interest

rates in very short-term lend-

ing markets to rise sharply. In

response, the Fed injected

billions of dollars of cash to

pull rates down to their

target range.

Fed officials discussed the

issue at their policy meeting

on Sept. 17 and 18, and min-

utes of that gathering—to be

released Wednesday—will

provide some details on their

thinking.

Among the decisions they

face: when and how to re-

sume increasing the size of

their asset portfolio—often

referred to as the balance

sheet—and whether to create

new tools to reduce money

market volatility. The Fed

also will have to clarify that

such moves are aimed at

smoothing out market opera-

tions, not providing new eco-

nomic stimulus.

F

edpolicy makers set

their benchmark fed-

eral-funds rate to influ-

ence a suite of short-term

rates at which banks lend to

each other overnight, includ-

ing in the “repo” market for

collateralized short-term

loans.

The repo market is an ar-

cane but important part of

the financial system. With $

trillion in funding flowing

through it every day, any dis-

ruptions—if allowed to fes-

ter—could influence the rates

businesses and consumers

pay and also drag on eco-

nomic growth.

The Fed’s intervention in

repo markets, which will con-

tinue at least through early

November, were standard op-

erating procedure before the

2008 crisis. But today they

amount to a temporary Band-

Aid, which is why officials

must now settle on a perma-

nent fix.

Some analysts say last

month’s rupture shows how

the Fed’s delays in finalizing

nuts-and-bolts decisions that

could have been made months

or years ago—either because

officials couldn’t reach agree-

ment or didn’t feel urgency to

do so—has now forced the

central bank to play catch up.

At issue is some complex

monetary plumbing. To boost

growth after the 2008 finan-

cial crisis, the Fed bought

bonds to push down long-

term interest rates and drive

up asset prices. These pur-

chases flooded the banking

sector with deposits held at

the central bank, known as

reserves.

Before the 2008 crisis, the

Fed kept its balance sheet at

less than $1 trillion. The size

was dictated primarily by de-

mand for the Fed’s liabilities,

balance sheet growth at their

Oct. 29 and 30 meeting, but

many market participants

“are now hoping for some-

thing more audacious,” said

Lou Crandall, chief economist

at financial-research firm

Wrightson ICAP.

Some current and former

Fed officials think the easiest

fix would be to build a “buf-

fer” of reserves $150 billion

or $250 billion above mid-

September’s low water-

mark by buying Treasury se-

curities.

“The way to address [re-

serve scarcity] is to start

growing our reserves...and

maybe increase [them]

enough that we don’t have to

do as many high-frequency

interventions,” Boston Fed

President Eric Rosengren said

in an interview.

The Fed also could add

new tools. Officials in June

debated creating a so-called

standing repo facility that

would allow banks to ex-

change Treasurys for reserves

without the stigma of emer-

gency borrowing at the Fed’s

discount window.

Officials would have to de-

termine certain details, in-

cluding which financial insti-

tutions would have access and

what interest rates to charge.

They don’t appear to be close

to making any decisions.

The discussions about this

tool “are in their infancy, and

there is more work to be

done,” said Philadelphia Fed

President Patrick Harker in a

speech last month.

TheFed'sreducedbalancesheetandthegrowthofnonreserve

liabilities,suchascurrencyincirculation,havereducedreserves.

Source: Federal Reserve

Bank deposits held at the

Federal Reserve

Federal Reserve balance sheet

2004 ’10 ’

$

0

1

2

3

0

1

2

3

4

trillion

2004 ’10 ’

$

4

trillion

Nonreserve

liabilities

Asset holdings

ECONOMIC

CALENDAR

Monday:Amid a global man-

ufacturing pullback, German

manufacturers especially have

suffered as export orders in par-

ticular have declined sharply.

Monday’s data on new orders

may point to a stabilization in

August. Economists expect to

see manufacturing orders up

0.2% from the previous month,

while remaining 2.7% down on a

year earlier. However, as weak

orders continue to flow through

factory floors, they expect fig-

ures to be released Tuesday and

Wednesday will show a 0.1%

drop in industrial production in

the same month, and a narrow-

ing of Germany’s trade surplus.

Wednesday:TheFederal Re-

servereleases minutes from its

Sept. 17-18 meeting, when offi-

cials voted to cut interest rates

by a quarter-percentage point.

Investors will look for additional

insight into how Fed officials are

thinking as talks of another rate

cut remain on the table.

Thursday:The U.S.Labor De-

partmentissues theconsumer-

price index, which measures

changes in how much Americans

are paying for items such as

clothes, gas and food. Econo-

mists surveyed by The Wall

Street Journal forecast the index

rose 0.1% in September from the

prior month and 1.8% from the

prior year.

Friday:The University of

Michigan will release the prelimi-

nary October results of its

monthlyconsumer-sentiment

survey. Economists expect the

survey’s main index—which is

based on survey respondents’

assessments of current eco-

nomic conditions and their fu-

ture expectations—to be lower

in October than in September.

for an NBA game in China.

China has reciprocated by

going crazy for basketball. The

12-hour time difference between

the East Coast means fans can

watch early NBA games on their

phones during their morning

commutes and stream West

Coast games over lunch.

But the international basket-

U.S. WATCH

was merely voicing one

thought, based on one interpre-

tation, of one complicated

event. I have had a lot of oppor-

tunity since that tweet to hear

and consider other perspec-

tives. I have always appreciated

the significant support our Chi-

nese fans and sponsors have

provided and I would hope that

those who are upset will know

that offending or misunder-

standing them wasn’t my inten-

tion.”

There are billions of dollars

at stake for the NBA. The league

has long viewed China as the

engine of future international

growth and spent years court-

ing the country’s massive audi-

ence. It often boasts about the

country’s basketball population

of 300 million players, and

nearly 500 million people in

China watched the NBA on Ten-

cent’s streaming platforms last

season. The deciding game of

last year’s finals set a record for

the largest streaming audience

Constellation BrandsInc.

trades under the symbol STZ.

In some editions Saturday, an

item on the company in The

Score column incorrectly gave

the symbol as CNST, which is

the symbol forConstellation

PharmaceuticalsInc.

CORRECTIONS

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influence of foreign money in a

high-profile example of the dif-

ficulties American companies

encounter when dealing with

businesses in authoritarian

China. It is already the most

sensitive political situation that

Mr. Silver has faced in his five

years as commissioner.

The early wave of response

in the U.S. brought criticism

from across the political spec-

trum. Sen. Ted Cruz (R., Texas)

accused the NBA of “shamefully

retreating” and said on Twitter

that “human rights shouldn’t be

for sale” and “the NBA

shouldn’t be assisting Chinese

communist censorship.” Julián

Castro, a Texan running for the

Democratic presidential nomi-

nation, said “China is using eco-

nomic power to silence critics”

and that the U.S. must “not al-

low American citizens to be bul-

lied by an authoritarian govern-

ment.”

The most forwarded com-

ment on China’s Weibo social-

media platform in response to

the NBA’s statement featured an

emoji of a chicken, meant as a

profane euphemism, while a

small number of users were

calling for cancellation of the

China games this week.

The unfolding crisis quickly

challenged the NBA’s yearslong

effort to position itself as the

most progressive of the major

American sports leagues by en-

couraging free speech and

spreading basketball around the

world.

“I did not intend my tweet to

cause any offense to Rockets

fans and friends of mine in

China,” Mr. Morey wrote in his

public response on Sunday. “I

ball tournament overlapped

with a period of unrest in Hong

Kong. The protests erupted in

June in an effort to press the

city’s government to formally

withdraw an extradition bill

that would allow people to be

sent to mainland China to face

trial under its murky legal sys-

tem. This was the 18th straight

weekend of mass rallies, and

there has been growing pres-

sure for ordinary citizens and

powerful companies to articu-

late whether they support the

protests or Beijing.

NBA players and coaches

have become comfortable in re-

cent years voicing their political

opinions about President Trump

and issues like police brutality,

systemic racism and gun vio-

lence, and the league has em-

braced its reputation for being

socially conscious. But a poten-

tial showdown with a foreign

government over the right to

free speech with enormous fi-

nancial consequences is far be-

yond the political complexities

the NBA is used to navigating.

Mr. Morey is one of the

league’s most successful execu-

tives. He came to the NBA by

way of a management-consult-

ing firm and business school,

and he has helped incite the

data revolution that has swept

professional sports as the public

face of the MIT Sloan Sports

Analytics Conference, the an-

nual industry convention of

sports quants. Mr. Morey was

voted by his peers as the NBA’s

executive of the year in 2018 af-

ter building the Rockets into a

perennial title contender.

—James T. Areddy

and Lekai Liu

contributed to this article.

support individuals’ educating

themselves and sharing their

views on matters important to

them,” NBA spokesman Mike

Bass said. “We have great re-

spect for the history and culture

of China and hope that sports

and the NBA can be used as a

unifying force to bridge cultural

divides and bring people to-

gether.”

It wasn’t immediately clear

how the Chinese government

would respond.

The ferocious response to

Mr. Morey’s tweet and the

NBA’s response coincided with

the league’s top executives de-

scending on China for pre-

season games in Shanghai and

Shenzhen this week. LeBron

James and the Los Angeles Lak-

ers are scheduled to play the

Brooklyn Nets, a team owned by

Joseph Tsai, the billionaire co-

founder of Chinese e-commerce

giant Alibaba. Mr. Tsai wrote on

Facebook: “The hurt that this

incident has caused will take a

long time to repair.”

NBA Commissioner Adam

Silver and the league’s top brass

were dealing with the crisis in

Japan before they travel to

China.

The rapidly unfolding series

of events over the weekend pits

democratic ideals against the

ContinuedfromPageOne

NBA Faces

Furor Over

China

GEORGIA

President Carter Gets

Stitches After a Fall

Jimmy Carter fell at his home

and needed some stitches but

“feels fine,” a spokeswoman for

the former president said.

Deanna Congileo said in an

email that Mr. Carter fell Sunday

at his Plains, Ga., home and re-

ceived stitches above his brow.

Mr. Carter turned 95 on Tuesday,

becoming the first U.S. president

to reach that milestone.

Ms. Congileo said Mr. Carter

and his wife, Rosalynn Carter,

who is 92, are eager to be at a

Habitat for Humanity project in

Nashville, Tenn. The opening cer-

emony was scheduled for Sun-

day evening, and it runs through

Friday.

Mr. Carter, the 39th president,

survived a cancer diagnosis in

2015 and surpassed George H.W.

Bush as the longest-lived U.S.

president in history this spring.

He had a hip replacement in

May and regularly teaches Sun-

day school.

—Associated Press

TEXAS

Killingof Witness in

Ex-Cop Trial Probed

Aman who was fatally shot

has been identified as a key wit-

ness in the murder trial of a

white Dallas police officer who

killed her black neighbor, Dallas

police said on Sunday.

Joshua Xavier Brown, 28, was

found Friday night in the parking

lot of an apartment complex

with multiple gunshot wounds,

authorities said. He was pro-

nounced dead at a hospital.

Mr. Brown lived in the same

apartment complex as Amber

Guyger and Botham Jean and

testified at Ms. Guyger’s trial.

She was convicted on Tuesday

of murdering Mr. Jean.

The Jean family attorney, Lee

Merritt, posted a statement on

Twitter that said he had spoken

with Mr. Brown’s mother. “We

need answers,” he wrote.

Homicide detectives are seek-

ing the public’s help in identify-

ing suspects and a motive in Mr.

Brown’s death.

—Associated Press

CALIFORNIA

Several Injured

In Utility Explosion

Five people were hurt in a se-

ries of explosions from an under-

ground electrical vault during an

Oktoberfest celebration at a retail

complex in Southern California,

authorities said.

Officials in Huntington Beach

said Sunday that four people, in-

cluding two firefighters, had minor

injuries. One person suffered mod-

erate to severe injuries.

The blasts around 8:15 p.m.

Saturday caused chaos as hun-

dreds gathered for the event at

Old World Village. Firefighters

were called to the scene for a re-

ported fire in the vault. The first

explosion splattered mineral oil

used to cool the transformers and

possibly ignited subsequent

blasts, officials said. The cause is

under investigation.

About 1,700 customers lost

power. Southern California Edison

said crews worked overnight to

replace three transformers in the

vault and restore power.

UNTETHERED:Hot-air balloons floated skyward Sunday at an annual festival in Albuquerque, N.M. —Associated Press

JERR

Y LARSON/WACO TRIBUNE-HERALD/ASSOCIATED PRESS

Houston Rockets general manager Daryl Morey and star James

Harden, who wore a jersey to mark Chinese New Year in February.

BILL

BAPTIST/NBAE/GETTY IMAGES

MA

TTHEW STOCKMAN/GETTY IMAGES

A2|Monday,October 7 , 2019 ***** THEWALLSTREETJOURNAL.

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