①U.S. Treasury Secretary Bessent said on Sunday that he does not believe the central bank will move quickly to reduce its balance sheet, even under the leadership of Kevin Warsh, the nominee for Federal Reserve Chairman;
②He also stated that Warsh would be a highly independent Federal Reserve Chairman.
Since U.S. President Trump announced the nomination of former Federal Reserve Governor Kevin Warsh as the next Federal Reserve Chair, concerns surrounding the new chair have persisted, focusing on potential sharp turns in Fed policy leading to liquidity tightening and compromised independence.
On Sunday local time, U.S. Treasury Secretary Bessent made comments attempting to ease market concerns. He stated that even under the leadership of Kevin Warsh, the nominee for Federal Reserve Chair (who has criticized the Fed's bond-buying behavior), he does not believe the central bank will act swiftly to reduce its balance sheet.
Bessent said in a program that the Federal Reserve may need up to a year to make decisions regarding its balance sheet, adding that Warsh would be a highly independent Fed Chair.
"As for how the Federal Reserve intends to adjust its balance sheet, it will be their autonomous decision." Bessent stated. If they implement an 'ample reserves' regime, I do not think they will act quickly because that indeed requires a larger balance sheet. Therefore, I think they might adopt a wait-and-see approach and take at least a year to decide what to do.
To lower long-term interest rates, the Federal Reserve significantly expanded its balance sheet during the global financial crisis and the COVID-19 pandemic, reaching a peak of $9 trillion in the summer of 2022. It then gradually reduced its balance sheet (a process known as quantitative tightening), bringing it down to $6.6 trillion by the end of 2025.
However, in December last year, the Federal Reserve restarted balance sheet expansion, announcing the launch of a short-term Treasury purchase plan to manage market liquidity levels and ensure steady control over the interest rate target system.
Warsh, who served as a Federal Reserve Governor from 2006 to 2011, believes that the large amount of bonds held by the Federal Reserve distorts financial conditions and advocates for a substantial reduction in the bond holdings of the central bank.
U.S. President Trump has expressed that he wants mortgage rates to drop significantly. Experts point out that reducing the Federal Reserve's balance sheet would contradict Trump’s goal of lowering interest rates, and maintaining financial stability while reducing the balance sheet is no easy task.
Moreover, given Warsh’s past hawkish remarks, many analysts are concerned that the Fed’s "rate-cutting path" could come to an abrupt halt.
However, Goldman Sachs noted in a report last week that the market might have once again misjudged the actual stance of this new Federal Reserve chairman. A Fed led by Warsh may not necessarily lead to higher interest rates, as rate cuts and quantitative easing policies are still under consideration. Goldman Sachs also believes that Warsh is unlikely to push for a significant reduction in the Fed's balance sheet due to broad internal support for the 'ample reserves' framework.
There remains uncertainty regarding what stance Warsh will adopt after assuming the role of Federal Reserve chairman, with widespread speculation in the market. Trump commented on this last Wednesday, stating bluntly that if his nominee for Federal Reserve chairman had ever expressed an intention to raise interest rates, that person would not have been given the job. He further stated that he has no doubt that interest rates will be cut 'very soon.'
Notably, just a day after announcing Warsh’s nomination as the next Federal Reserve chairman, Trump jokingly remarked that he might sue Warsh if he does not cut interest rates.
Moreover, Bessent did not rule out the possibility of such a scenario occurring. During a hearing before the Senate Banking Committee last week, he stated that whether Warsh could face legal action ultimately 'depends on the president,' should Warsh fail to lower interest rates according to President Trump's wishes.
Editor/Melody
