Battles to shrink the Federal Reserve's balance sheet begin

Data: Federal Reserve; Chart: Neil Irwin/Axios Incoming Federal Reserve chief Kevin Warsh's ambition to shrink the central bank's multitrillion-dollar bond portfolio may quickly run into hard limits. Why it matters: For nearly two decades, the Fed's ability to flood markets with liquidity has been among its most powerful crisis-fighting weapons — and, in Warsh's view, too often a go-to tool for monetary stimulus outside of crises. Now, the hot discussion among Fed officials and commentators is about how to responsibly shrink the Fed's asset portfolio — and whether that's even a worthwhile goal. The big picture: The Fed's assets ballooned from about $800 billion before the 2008 financial crisis to nearly $9 trillion at its 2022 peak — swelling each time the central bank stepped in to stabilize the economy, particularly through open-ended quantitative easing programs starting in 2012 and 2020. Three years of runoff brought the balance sheet back to $6.7 trillion, though the Fed resumed slowly growing it again after signs of stress in critical funding markets last December. What they're saying: Warsh, who's expected to be sworn in at the White House on Friday, has been a consistent critic of the size of the Fed's balance sheet and the intervention in financial markets that it generates. "As it's grown its balance sheet, grown its imprimatur on the economy, those with financial assets have benefited," Warsh said at his confirmation hearing . "If we were to cut rates, a broader number of people will benefit from it, versus quantitative easing, which tends to move through financial assets first." Yes, but: Reducing the Fed's holdings could cause mortgage rates and other longer-term borrowing costs to rise. And if undertaken without first reducing demand for reserves in the banking system, it could destabilize money markets. "If in the near term we're talking about a significant decrease in the balance sheet, that seems incompatible in a...

Original source: Axios