Federal Reserve Chair Kevin Warsh testified before the Senate Banking, Housing, and Urban Affairs Committee on the 15th (local time), stating he wants a 'leaner, meaner' balance sheet for the central bank. Warsh made the remarks in response to a senator's question about the smallest feasible size for the Fed's balance sheet. The testimony centered on the Fed's monetary policy framework and the appropriate role of balance sheet policy versus interest rate policy in managing inflation and economic conditions.
Warsh Advocates Smaller Fed Balance Sheet, Criticizes Permanent Expansion
Warsh told the Senate committee that interest rate policy should be central to monetary policy, though he acknowledged the balance sheet can expand during crises. He criticized the maintenance of a permanently large balance sheet, particularly when the central bank holds assets with longer duration than those in the Treasury market. Warsh characterized such practices as resembling fiscal policy rather than monetary policy, stating this exceeded his comfort level. He identified the balance sheet as one of two policy tools that must be considered together when addressing inflation risks and monetary policy.
Fed Chair Distinguishes Policy Design from Market Operations
Warsh outlined a framework distinguishing between policy design and operational execution. He stated that FOMC policymakers should determine the architecture of monetary policy, while the Federal Reserve Bank of New York handles the operational implementation or 'plumbing.' Warsh emphasized that policy design should determine operations, not the reverse, expressing discomfort with market operations driving monetary policy decisions. He indicated the Fed will make monetary policy decisions related to the balance sheet going forward. Warsh stated he remains open to changes but emphasized any modifications would proceed carefully through sufficient discussion and explanation, allowing markets adequate time to adapt.
Warsh Emphasizes Fed Independence from Presidential Influence
Warsh addressed Fed independence during his testimony, stating the President never attempted to influence monetary policy before he assumed the role or before his swearing-in ceremony. He said if such attempts occurred, he would continue doing his job quietly. Warsh noted he does not feel uncomfortable receiving calls from the committee chair or the President. He stated he will act according to his own judgment and that the President has never requested anything inappropriate from him.
FAQ
What did Fed Chair Warsh say about the Fed's balance sheet on the 15th?
Fed Chair Kevin Warsh testified before the Senate Banking Committee on the 15th (local time), stating he wants a 'leaner, meaner' balance sheet for the Federal Reserve. He emphasized that interest rate policy should be central to monetary policy, though the balance sheet can expand during crises.
Why does Warsh criticize a permanently large Fed balance sheet?
Warsh stated that maintaining a permanently large balance sheet, especially when holding assets with longer duration than those in the Treasury market, resembles fiscal policy rather than monetary policy. He characterized this as exceeding his comfort level and emphasized the need to consider the balance sheet as one of two policy tools when addressing inflation risks.
How did Warsh address Fed independence in his testimony?
Warsh emphasized that the President never attempted to influence monetary policy before his appointment or swearing-in. He stated he will act according to his own judgment and that the President has never requested anything inappropriate from him, reinforcing the Fed's independence from political pressure.
