Warsh’s Return Revives Tensions Over the Fed’s $6.6 Trillion QE Hangover
View original at finance.yahoo.comWarsh’s Return Revives Tensions Over the Fed’s $6.6 Trillion QE Hangover Photographer: Tierney L…
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Demand for bank reserves and Fed balance sheet size is determined by banks' regulatory and internal liquidity needs
80% confidenceIf Warsh dislikes balance sheet expansion as a way to compress yields, then responsibility falls onto Treasury
80% confidenceRun printing press less, let balance sheet come down, let Treasury handle fiscal accounts to achieve materially lower interest rates
80% confidenceKevin Warsh has been very critical of the Fed's balance sheet expansion
80% confidenceThere is a bit of wiggle room within Fed definition of ample reserves
80% confidenceFed can move short rate to offset balance sheet actions; shrinking balance sheet on principle allows offsetting rate cuts if long rates increase
80% confidenceNeed new Treasury-Fed accord like 1951 where Fed chair and Treasury secretary describe objective for Fed balance sheet size to markets
80% confidenceFor now it's status quo, but markets will remain on edge until Warsh makes his views clearer
80% confidenceAddition of another balance-sheet hawk on FOMC should help keep check on future asset purchases or reinvestment policies
80% confidenceSignificantly smaller balance sheet would likely require major shift in Fed's existing bank regulatory framework
80% confidenceAggressive bond buying artificially depressed borrowing rates for extended periods, fanned Wall Street risk-taking and encouraged lawmakers to pile on more debt
80% confidence