Kevin Warsh's real Fed 'regime change' may happen deep inside Wall Street's plumbing
View original at cnbc.comKevin Warsh's real Fed 'regime change' may happen deep inside Wall Street's plumbing Incoming Federal Reserve Chair Kevin Warsh's talk about "regime change" at the central bank has generated speculation about everything from interest rates to major personnel changes to fundamental alterations in the way it operates and…
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The Federal Reserve's balance sheet is bloated and could be reduced while simultaneously allowing the Fed to lower interest rates
60% confidenceUnder a Warsh Fed, the overnight repo rate could become the primary policy rate, replacing the federal funds rate as the key transmission mechanism for monetary policy
60% confidenceThe Federal Reserve could return to a system of scarce reserves and it would work perfectly well, though it would be complicated and must be done slowly
60% confidenceA repo-rate-as-policy-rate framework could let Warsh satisfy Trump's push for lower interest rates while still maintaining tighter underlying financing conditions to combat persistent inflation
60% confidenceUp to $2.1 trillion in balance sheet reductions could be achieved through the current policy framework, with further cuts possible under a scarce reserves approach; the process would take at least a year and quite possibly several
60% confidenceThe Fed has never adequately explained when and why it uses asset purchases for monetary policy reasons versus other reasons
60% confidenceFocusing only on balance sheet size is too narrow; duration and composition also matter, and neglecting them could cause increased volatility and more Fed interventions; lowering bank reserve requirements could destabilize the system
60% confidenceThe Fed should publicly establish a clear framework for future balance sheet operations so markets can form sensible expectations rather than assuming unlimited intervention
60% confidenceAny changes in the Federal Reserve's balance sheet should be gradual and carefully planned
60% confidencePolitical considerations never enter FOMC meeting discussions; this was true even under Alan Greenspan's chairmanship
60% confidenceThe Fed balance sheet debate is a medium-term project requiring careful implementation; no one including Warsh argues it can be done rapidly
60% confidenceShrinking the Fed balance sheet is the wrong objective; proposals to do so would undermine bank resilience, impede money market functioning, threaten financial stability, and some would actually increase the Fed's footprint in financial markets
60% confidence