Battles to shrink the Federal Reserve's balance sheet begin
Summary
Incoming Federal Reserve chief Kevin Warsh wants to reduce the Fed’s large collection of bonds, which grew sharply after the 2008 crisis and the COVID-19 pandemic. However, many Fed officials worry that shrinking the balance sheet too fast could cause higher borrowing costs and market problems.Key Facts
- The Fed’s assets grew from $800 billion before 2008 to almost $9 trillion in 2022 due to crisis support programs.
- The balance sheet has been reduced to $6.7 trillion but started growing again last December due to market stresses.
- Warsh criticizes the Fed’s large balance sheet and prefers cutting interest rates to help the broader economy.
- Shrinking the balance sheet could push up mortgage and long-term borrowing rates.
- Rapid reductions in the balance sheet risk destabilizing money markets, as seen in 2019.
- Some Fed officials doubt current ideas to reduce banks’ need for reserves, an important part of the balance sheet.
- Warsh plans to reduce the balance sheet “slowly and deliberately” to avoid damaging financial stability.
- Fed governor Michael Barr opposes shrinking the balance sheet, saying it could harm banks and money markets.
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