By Michael S. Derby
NEW YORK, Oct 28 (Reuters) – Federal Reserve Chairman Kevin Warsh on Wednesday said US central bank policymakers will start to weigh the recommendations of a task force studying balance sheet issues sometime in the new year.
Members of the panel looking at how the central bank uses its holdings of bonds, cash and other assets to achieve its policy goals “are working away and comparing their best thoughts,” Warsh said in a press conference following the end of the Fed’s latest two-day policy meeting.
“I think the conclusions they come to, the recommendations they come to, will be fed into the (Federal Open Market Committee) probably early in the first quarter,” although that could change, he said.
Before taking over as head of the US central bank in May, Warsh was a regular critic of how the Fed had used purchases of bonds to augment its broader monetary policy mission. The Fed bought large amounts of bonds during the 2008 global financial crisis and the COVID-19 pandemic to calm markets and provide stimulus when its benchmark interest rate was at near-zero levels.
The purchases took the Fed’s holdings from under $1 trillion before the global financial crisis to a peak of about $9 trillion by the summer of 2022. Though the central bank’s overall holdings are now around $6.8 trillion due to the passive runoff of securities, it has found that it cannot shrink holdings much more due to the risk of generating money market volatility.
Warsh believes large-scale Fed bond holdings distort markets, though others inside and outside the central bank dispute this view.
The challenge to getting the holdings down much further is that it requires big changes in the toolkit the Fed uses to manage short-term interest rates. It would also require regulatory changes permitting financial institutions to hold lower levels of emergency cash, which some contend would make the banking system riskier.
Warsh has acknowledged there are no quick fixes because it took many years for the Fed’s holdings to get to where they are.
Little is known about the balance sheet task force’s work and what it will say to the central bank when its study is complete. Whatever it does recommend will need to be hashed out by central bank officials, and observers expect the process will take some time to play out.
“If we decide to make changes in the balance sheet, it’ll be after a serious consideration of their proposals and their recommendations,” Warsh said of the task force. “I think it is unlikely to have any material effect” on policymaking right now, but it’s an important issue and “I look forward to doing it with the help of the outside task force.”
(Reporting by Michael S. Derby; Editing by Paul Simao)
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