Even during the Senate hearings, Warsh stuck to his guns: the Fed should have a smaller balance sheet.
By Wolf Richter for WOLF STREET.
The Department of Justice announced this morning in an X post by US Attorney Jeanine Pirro that it would end its investigation into the construction cost overruns of the Federal Reserve buildings in Washington DC, and that it asked the Inspector General for the Federal Reserve to “scrutinize the building cost overruns.”
“I expect a comprehensive report in short order and am confident the outcome will assist in resolving, once and for all, the questions that led this office to issue subpoenas,” she wrote in the post.
And she said: “I have directed my office to close our investigation as the IG undertakes this inquiry. Note well, however, that I will not hesitate to restart a criminal investigation should the facts warrant doing so.”
Powell already asked the IG last July to scrutinize the building cost overruns, and that work has continued.
The DOJ investigation blocked the confirmation by the Senate Banking Committee of Kevin Warsh, nominated by Trump to succeed Powell as Fed chair, because retiring Senator Thom Tillis (R.NC) had vowed he would not support any Fed nominee as long as the DOJ’s investigation into Powell was going on. Republicans have only a 13-11 majority, and all 11 Democrats have also vowed to oppose any nomination until the investigation ends.
At the hearings on Tuesday, Tillis said during his time slot to grill Warsh: “Let’s get rid of the investigation so that I can support your confirmation.” And now he can.
Powell was the architect of mega-QE from March 2020 through early 2022, even as inflation began raging in early 2021 – “the most reckless Fed ever” is what I called it at the time for that reason. And he was the architect just before covid of the “ample reserves regime” that prescribed a relatively bloated balance sheet even when there is no crisis. These policies, among other effects, distorted and destroyed the housing market as they caused home prices to explode from mid-2020 through mid-2022, after already surging for years.
Warsh and Bennet, who picked Warsh as one of the candidates, have publicly opposed these policies. Bessent did so in an essay last September which blasted the Fed for QE, its “perverse incentives” for fiscal “irresponsibility,” the Fed’s “wealth effect” policies, its failure to deal with inflation, and so on ( my discussion of his essay). And Warsh has done so for many years.
When Warsh was a governor on the Federal Reserve Board under Bernanke, he supported QE-1 to get the Financial Crisis under control. But Bernanke pushed for QE-2 despite a recovering economy and roaring markets, and against substantial opposition from some members on the FOMC, including Warsh and Thomas Hoenig. Bernanke persevered and announced QE-2 in November 2010. In response, Warsh quit in March 2011 and Hoenig retired later in 2011. Warsh explained all this and why he quit in a speech in 2018.
Even during the selection process, and this week during the Senate confirmation hearings, Warsh stuck to his guns: the Fed should have a smaller balance sheet than it has now. He has also been an inflation hawk – and he thinks reducing the balance sheet will make it easier to keep a lid on inflation. His hostility to “money printing” appears to be etched in stone, and Bessent is with him on this.
During the Senate hearings, Warsh called for a “regime change” at the Fed – a change of the policy regime he explained, not the presidents of the regional Federal reserve banks. This might include the “ample reserves regime” that Powell concocted.
Powell’s term as Fed chair expires on May 15. His separate term as a governor of the Federal Reserve Board of Governors expires in January 2028. In the past, when the Fed chair term expired, Fed chairs also resigned from their governor slots and departed the Fed entirely, thereby making room for a new governor – in this case Warsh.
But at the last FOMC press conference, Powell had said that he would stay on as “chair pro tempore” until a new Fed chair was confirmed, and that he had “no intention of leaving the Board until the investigation is well and truly over, with transparency and finality.” So both of these elements seem to be a step closer and on track, and Powell should start looking for some cardboard boxes to pack up his stuff, including his “ample reserves regime,” and enjoy his retirement.
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He wants QT which is fine by me, but he probably will push for lower interest rates which is not. If you want to tighten monetary policy to end the rampant speculation in the market, force Congress to curb spending, and bring inflation down, you can’t have your cake and eat it too. I want someone at the Fed who isn’t afraid to make the tough decisions irrespective of which political party is in power.
The Fed’s policy rates only affect short-term rates. Long-term rates are set by the bond market. If he gets a majority on the FOMC for QT, and they do implement it, it would mean slightly higher long-term rates… that includes most of the rates that really matter, such as mortgages and corporate bonds.
He was very hedged during the hearings about cutting the Fed’s policy rates. He sees lots of issues with that. And he won’t be in any kind of rush. You should listen to the things he said about it. But he does have the theory that a smaller balance sheet will put a lid on inflation, and that down the road — not at first — the business use of AI will trigger productivity gains that will bring down inflation. But he was also hedged about that, conceding that this is a theory and that there is no data yet. And he said that short-term, the massive investment in AI may further fuel inflation. He showed an analytical balanced approach to the whole issue.
Warsh would not agree that tariffs cause inflation, nor that dropping the Fed rate to 1% would cause inflation. Yes he said a lot of positive things as you point out, but the big question is whether he would bend the knee to Trump when Trump demands very low interest rates, which we all know Trump will demand. And of course Trump will have a hissy fit if Warsh does not accede to Trump’s demand.
Walsh will be a great Fed chief. Even better than Volcker. He will reduce the balance sheet and this will lead to lower interest rates. Good move to drop the DOJ investigation and move it to the IG.
Is anybody watching inflation?
5 years over the “target” and ramping up now….even pre Iran…
and people still….STILL speak of lowering rates?
If you lower rates with what is going on, when do you raise them?
Stocks all time highs….inflation ramping. Gold all time highs.
Where we are headed is to much HIGHER Federal Reserve interest rates and that has nothing to do with their balance sheet.
It’s been a while since I’ve heard some sensible discussion during nomination hearings.
I don’t think Powell has done a bad job, it’s not his fault Congress and the current and last president were/are addicted to spending. But slowing QT while we still have inflationary issues just felt like the wrong move.
We need a smaller fed balance sheet and fiscal debt. Higher taxes on the ultra rich – however we get there. We are past the level of inequality we saw in the gilded age, it’s time we admitted that. Fiscal and monetary tightening will put a lid on the inflation and runaway debt issues we are facing.
Although I doubt they’re advocating for that last piece, sadly our political system is bought and paid for.
Powell has done an abominable job.
Sure, maybe some QE during the spring of 2020 was allowable. How about continuing it for 2 more years while home prices went up 40%? “Transitory inflation my @$#. He nuked the home buying potential of a generation of Americans. It will take a decade for home prices to reequilibrate with wages.
This was inexcusable and totally unnecessary.
The reason we have extreme growth of the ultra wealthy IS low interest rates promulgated by the Fed until 2023. There was no alternative to stock that paid sufficient return, and the ultra wealthy own stocks disproportionately. They don’t need to pay higher taxes, those will be wasted by a government that knows no bounds, but if you want less income inequality, let’s try not inflating a stock bubble for 2 decades (not all Powell obviously, Yellen and Bernanke are equally at fault).
Ekkylc,
Powell printed $4.6 Trillion in funny money. He blew the “Everything bubble”.
Young people can’t afford to buy homes, get married & make babies. I know these young people & my heart breaks for them.
Powell is a mild mannered monster who steered the world economy off of the precipice.
We desperately need a Volker. Everyone says they want to be a Volker. They get to the Eccles building & turns out Wall Street owns their soul.
Wolf, could you explain WHY Warsh believes reducing the size of the Fed’s balance sheet (other than the QT required to get there) would result in lower inflation? What’s his competing idea?
I understand Bernake’s theory was to be able to say “look how much ammunition I have to withdraw currency from Main Street” so as to prevent anyone from even thinking there was a possibility that inflation could get out of hand. And to some extent, it did work. Post-GFC inflation was strangely low, despite ZIRP. Then the inflation spike of 2021 was quickly doused by QT before interest rates ever exceeded 2%. The US is still borrowing at less than 5% despite all the warning signs and spiraling deficits.
But what is Warsh’s theory about having less ammunition being good? Is it about asset valuations going through the roof, as you alluded to? I.e. was the flaw in Bernake’s theory that the increased money supply* led to asset price spirals, even if inflation expectations could never get out of control?
*the increased money supply / money printing was a fiscal decision by Congress, not a monetary decision made by the Fed. So perhaps in a more perfect world, Bernake’s theory would have had no downsides?
He just wants negative real rates to kill the debt.
Depending on real inflation,he will raise or lower the rates.
If real inflation gets high because of oil,he can raise rates higher,this will still bring negative real rates.
Trump needs badly real inflation.The debt needs it,not the people.
Short-term interest rates don’t have much impact on the economy or the debt. Long-term interest rates do. Too low short-term rates spook the bond market, and long-term rates will spike. Neither the Fed nor the government can afford to do that.
The debt needs strong nominal economic growth and moderate inflation (3-5%) that combined outgrow the growth of the debt.
Nicholas R,
Worse is having a sycophant being the head. If you can accept objective reality then you have no business being anywhere near the Fed. That said, it is the US so everything for sale.
Powell enlarged the Fed’s balance sheet 2020-2022 because interest rates were at zero so that tool was not available. Deep fears that the country would fall into an even worse economic slump did, in my view, justify the money injections. Given also that inflation was in great part caused by broken supply chains, Powell’s inclination to see it as “temporary “ was, to a reasonable extent, justified. It was indeed temporary (at least the massive peak) but what length of time is temporary as opposed to persistent is in the eyes of the beholder.
IMO, the use of the Fed balance sheet was justified because there were no other tools. PPP was riddled with inefficiencies and a good deal of fraud, and caused the deficit to explode.
The only thing that caused the deficit to explode was idiotic VAST PROFLIGATE OVERSPENDING by Congress which is an issue totally beyond any control by the Federal Reserve.
No, this is not entirely accurate.
The Fed manipulated both short and long term interest rates by keeping short term rates several percent below typical rates for 15 years, and long term rates by buying large portions of long debt issued by the US Treasury.
This kept rates far lower, and Federal interest payments far lower than they would have been otherwise.
If rates had been higher, the profligate deficit spending of the last 15 years would have led to vastly higher interest rates, and it’s likely that Congress would have been forced to confront deficit spending by now, either with less spending or more taxes, or s little of both.
The Fed has been the primary enabler of this bad fiscal behavior on the part of both recent administrations and Congress.
um no…it was idiotic 0% interest rates in the face of a housing market on fire and “transitory” inflation that wasn’t
“It was indeed temporary (at least the massive peak)”
The Fed hiked from near-0% to 5.25% and shed $2 trillion from its balance sheet. That cooled inflation. If the Fed had kept its policy rates at near-0% and kept doing QE, as Powell threatened to do in the spring of 2021, inflation would have hit 20% no sweat. It was “transitory” only because the Fed finally cracked down.
Powell’s QE was only justified if your #1 priority is to inflate asset prices out the wazoo without rhyme or reason, including the home price explosion that is now causing such big problems, and if you don’t mind lots of consumer price inflation. Lots of people benefited from that (including the higher prices which caused corporate profits to explode), and in their eyes, QE was justified. But when inflation headed toward 10%, even Powell pulled the ripcord on QE and started QT.
In March 2020, the Treasury market was locking up due to the basis trade going awry amid the covid dynamics. And that was a big issue. But the Fed could have dealt with it by offering lots of repos – that’s its classic tool to deal with bond market freeze-ups, such as during 9-11. Then after a week or two, when the dust settles, the repos get paid back and come off the balance sheet, and the balance sheet goes back to where it was before. That’s how the Fed has dealt with every crisis until Bernanke unleashed QE. And the Fed needs to get back to that method.
Yes. The people who defend Powell the most are those who benefited strongly. It’s clearly unbridled self-interest.
“The people who defend Powell the most are those who benefited strongly”
You mean by not living through a Great Depression? Of course, that would have been declared the Fed’s fault too.
Wolf, do you think reducing the Fed’s balance sheet will reverse the growing M2 supply?
If so, do you think they’ll stop rolling over bonds into T-bills?
Getting the money supply to stop growing would seem to be a good objective.
Growing profitable economic activity, including labor, increases money flowing through those bank accounts and money market funds that make up the M-2 money supply measure, by definition. There is nothing wrong with M-2 money supply growing as a result of growing profitable economic activity.
These are the accounts that go into M-2:
– currency in circulation
– checking accounts, other demand deposits, and liquid transaction accounts at commercial banks, thrifts, and credit unions
– CDs of less than $100,000 at banks, less IRAs and Keogh balances at banks.
– retail money market funds less IRA and Keogh balances at MMFs.
Price increases of everything that is sold including labor (inflation) also increase the flow of money into those accounts that make up M-2.
The third source – the artificial source – of M-2 money supply is the Fed’s QE. Mega-QE showed up in M-2 because it was so huge and fast. And the first part of QT showed up (decline of M-2). But there was a lot of economic growth (nominal) and a lot of price increases (including labor) that pushed up M-2 again overpowering the effects of QT on M-2 money supply. So if the Fed reduces its balance sheet slowly, and the economic is growing and profitable, and prices of everything (including labor) continue to rise, I don’t see how M-2 could decline.
Truer words were never spoken, Wolf!
I’m so tired of people defending what was indefensible, even at the time. Under no circumstances, even if you’re worried about an economic slump, is printing $3 trillion in a period of a few weeks justified.
And in no circumstances is continuing to print for a year and a half, long after a recovery has began, justified.
They have avoided 97 of the last ZERO recessions, though. There is that, and they congratulate themselves, in addition to-
“In my view, anything that pushes up my stocks is justified.” /s
Powell will go down as one of the worst Fed chairs in history. His policies inflicted long term damage needlessly. But he made his pals rich.
Given his record and lack of character, I am far from sure that he should not be under investigation for the building cost overruns, BTW. It would fit right in with the rest of his sleazy conduct.
I agree he SHOULD go down that way, but I’m not sure he will, because the elite who control Wall Street, the media, and the academy, are the ones writing the narrative.
And they praise him for “saving America from a depression catastrophe”
Here here! The Fed’s mandate is inflation and unemployment, not asset prices.
It’s easy to judge in hindsight what policies were good and what were bad. It’s much more difficult when the economy is currently on the brink of falling apart due to mortgage bonds or world pandemics.
And remember that we don’t see all that would have happened had different choices been made.
I can guarantee, though, that people would be complaining about those choices, too.
The economy was fine 2012-2016 when additional massive QE was done for no discernable reason. The 2008 QE should have been aggressively winded down by 2012.
Yes, but QE ended in 2014 and the balance sheet remained flat until QT started in late 2017.
He could have raised to 1-2% in spring of 2021. There were business loans, frozen mortgages, extended and extra unemployment. 0% rates were not necessary.
Additionally anyone who saw the soaring housing prices and the employment shortage should have known to raise rates.
He’s evil. He turned this country known for its middle class, home ownership, and the potential for upward economic mobility and turned it into a K shaped economy resembling many 3rd world countries. This was just to make himself and his friends richer. I mean I took one monetary policy class in college and I would have done a better job.
Hmmmm., My gut instinct says this sounds like the prelude to austerity.
To end money printing = “austerity” 🤣
new one to me
Your gut is wrong. There hasn’t been true austerity in the US since before the Nixon shock, and that was 1971!
Reagan fired Volcker in 1987, after tripling the national debt. Volcker was austere, Reagan wasn’t.
Paul Volcker was NOT fired by Ronald Reagan in 1987. In fact, Reagan (whose undergraduate degree was in Economics and understood EXACTLY what Volcker was up to in boosting rates starting in 1980) had already reappointed Volcker to a second term in 1983.
At the White House press conference where Volcker announced his resignation Volcker explicitly stated,
“There’s a time to come and a time to leave,” Volcker declared at a hastily convened White House news conference. “I had no feeling I was being pushed.”
Reagan said at the same press conference that he accepted the Fed chairman’s decision “with great reluctance and regret.”
Moreover, Reagan’s Treasury Secretary James A. Baker III disclosed that he had tried to persuade Volcker to accept a third four-year term at the helm of the nation’s financial system.
There was obviously stuff going on behind the scenes (there always is in government) but it had more to do with reigning Volcker in (through the appointment of additional Fed Board members) than in wanting to fire him outright.
https://www.latimes.com/archives/la-xpm-1987-06-03-mn-2698-story.html
Austerity is not a popular concept in the country that eviscerated Jimmy Carter for suggesting they turn down their thermostats in winter. Ross Perot came in 3rd out of 3 candidates with that message.
Trump is interesting because he promised austerity and delivered money-printing stimulus. Had he taken the Perot path the public would have rejected him.
Some sanity.
I’ve never been one to call for the return of the gold standard but the uncoupling of labor productivity and real wages began to diverge after we left it. Every new financial innovation seems to have only accelerated that uncoupling.
There were serious flaws with the gold standard but it’s time we acknowledge the various flaws in our current model, of which QE is only one part.
I agree with you, but would extend it further to say that the complete finanicalization of Western economies has led to huge, systemic problems. I don’t see any way to undo what we’ve done over the last 50 years, but many of the problems we see now are due to ever new ways to financialize the means of production. Those MBAs and financial gurus may initially have helped bring liquidity to the system, but it is now out of control.
At this point, the Fed is an abomination that has been rewarding bad behavior and facilitating the greatest theft of real wealth that the planet has ever seen.
Looking forward to Wolf’s next Fed analysis BUT, despite “the greatest eCONomy ever” the Fed has begun expanding its balance sheet again and is now back over 6.7 trillion.
We have had feudal systems before and we know how this turns out folks.
Hedge accordingly.
WARburg to WARsh…how fitting for the brainwashed entertainment saturated casting show from the INSTITUTION…COVID was a money grab, inflationary money grab, the rest is masterbation from the institution…
We could do a LOT worse than Warsh.
Not hard to do better than Powell. No one was worse than Bernanke. I hope Warsh follows through with the balance sheet.
You could easily argue that Greenspan was worse. He set the precedent for the Fed running to the rescue after the dotcom bubble burst, which only threw fuel on the fire of the brewing mortgage bubble. And the 2001 recession wasn’t even all that bad either.
Then when they became aware of the housing bubble in 2004, they hike rates quickly in order to stop (pop) the bubble and then Blackstone came in and took your house. But yes, we could do a lot worse than Warsh
The Fed has been rudderless for 39 years. Let’s hope Warsh ends the moneyprinting. That will force some fiscal discipline on the politicians., who have had 4 decades of behaving like spoiled children.
Take a look at Germany’s history of recessions in the 21st century before advocating austerity and an Andrew Mellon “let it sort itself out” approach.
What’s R * now? Powell handed Warsh a problem. Even Barnett gets this right. Money is too loose.
Positive real rates (≠) tight monetary stance.
https://tradingeconomics.com/commodity/crb
Why is investigating massive cost overruns such a political issue?
It shouldn’t be, but the White House designed it as a political issue from the first second. Cost-overruns are not a crime. they happen all the time in complicated big construction projects, especially during a time of lots of inflation that blew all estimates apart. And investigating cost-overruns is not the issue. The issue is that they started a criminal investigation, under the pretext that Powell lied to Congress, in order to force Powell’s policy hands. That’s the issue. That’s political from the first moment.
Warsh “ His hostility to “money printing” appears to be etched in stone, and Bessent is with him on this.”
Do you think Trump is aware of this? Trump doesn’t seem to have a problem bailing out companies. (Now Spirit)
And now Bessent considering swap lines for the UAE and other gulf countries, Argentina credit line. (Paid back), lifted Russian sanctions, etc.
I think Bessent and Warsh cave to Trump if there is a problem with bailouts and so the Fed PUT might not be dead.
And the market seems to be brushing off these so called hawks.
Just My Opinion.
The stock market is in a complete mania and doesn’t notice anything anymore.
I am starting to believe that the market will never go down substantially ever again.
If 99 cents of every new dollar of wealth created in an economy go into the pockets of the people who need that money the least, how can the stock market ever crash again? You would need mass hysteria on a ‘War of the Worlds’ scale to create enough of a panic to do it, right? Or maybe just another COVID
The only way it’ll go down and stay there is if a crisis happens and the Fed doesn’t ride in to the rescue.
No matter what you can say about “retail participation,” or “forced auto 401K deposits,” what is keeping the market propped up are people buying any dip.
People are buying any dip because they’re convinced there is no risk. They are convinced there is no risk because the Fed will bail the market out.
Something has to happen that will convince them that there is major risk for dip buyers to stop jumping in each time.
As the saying goes: “the market can remain irrational longer than you can remain solvent”.
Yes I have repeatedly heard there is no risk from friends who graduated college 2015 or later. They save no money and take on insane amounts of risk in the stock market and real estate. They have never known a bad economy and have openly said the govt won’t let anything crash
AI driven trading programs buying AI stocks…..
(NASDAQ)
maddness
Intel gained $80 billion in market cap today on NOTHING.
They beat a ridiculously low estimate. All you heard or read about today was that they beat estimates and raised revenue guidance, BLAH BLAH BLAH. I didn’t hear one person on CNBC or read one article mentioning the totally absurd valuation.
[From Intel’s website: First-quarter revenue was $13.6 billion, up 7% year-over-year (YoY).
First-quarter earnings (loss) per share (EPS) attributable to Intel was $(0.73); non-GAAP EPS attributable to Intel was $0.29.
Forecasting second-quarter 2026 revenue of $13.8 billion to $14.8 billion; expecting second-quarter EPS attributable to Intel of $0.08 and non-GAAP EPS attributable to Intel of $0.20.]
Gee, I guess that’s worth another $80 Billion!!! The semiconductors are in a bubble all by themselves now.
Fuelled by the passive bid, which Mike Green has been studying.
Right. I’ve had many younger friends who graduated college 2015 or later tell me that recessions are a thing of the past. That the govt will always prop up the markets.
Stock market in mania. I sold half my NVIDIA when it hit $190 before the last dip and now I’m wondering do I just close my eyes and jump back in? Like we all no this is a bubble, but maybe we truly don’t let them burst anymore?
Inflation going up, likely at least a small oil shock even if the straight of hormuz opens today because it will take 6 months to clear the mines, long term structural damage to infrastructure that impacts Helium necessary for a lot of high end chips, and likely some ai related layoffs (Claude is finally good enough to do work) because one employee can now do the job of 3.
I haven’t seen daily moves like this in the stock market early 2008. Like so many stocks moving 10% or more in session.
The only problem with sitting this out is you get poorer by relative comparison….
My guess is the same people who believed Trump when he said he would get the deficit down are now believing Warsh when he says he is an inflation hawk.
One doesn’t just get a job in this administration without offering something in return.
Our fiscal position is rapidly becoming dire, our political situation is dire. In short, unless we can find a way through this mess, inflation is going to be a huge long term consequence of these events. And the old folks who spent so much time and high interest rate suffering are going to be reminded in full of the bad times. So, while everyone is complaining house prices are too high, just consider they are paid in coupons…and everyone thinks wages are too low as well. So higher wages and stagnant asset prices are the most likely outcome.
And yet we think everything will be fairly calm, like the every growing stock market of AI. All hail the new imploded stocks list, for it shall grow large….
Back in 2015, my dad told me that buy whatever you can. The US is (intentionally) going the way of South America. The asset holders are going to get really rich and everyone else will be poor. I thought this was just a crazy rant, but turns out he was right….
Powell leaving his rank & file Board of Governors seat before January 2028 would presumably create a vacancy for Trump to install another Stephen Miran.
I’m no fan of Powell’s policies but compared to another Miran he’s the lesser of two evils.
That’s not the math. There are 7 slots on the Board of Governors, one of which is Powell’s. He is Board member and Chair in one slot. If Powell stays on the Board till Jan 2028, but Warsh gets confirmed as Chair, there is no slot for Warsh, and Miran has to bow out of his slot to make room for Warsh. That was the agreement from the beginning when Miran was appointed, which is also why Miran was reluctant to give up his White House job — and had both jobs for a while simultaneously — because his stint at the Fed could be over in May 2026, when Warsh gets confirmed, and Powell decides to not resign from the Board, and Miran has to bow out by agreement to make room for Warsh.
Do you mean “by agreement” with the president, or because he’s finishing the term of a current member?
Wolf, I like the new option “Notify me of follow-up comments by email”.
I selected the box after one of my comments. Now I am getting email notifications for Every comment on the article. Not just replies to my comment. Is that the way it is supposed to work?
That’s not how it’s supposed to work. I turned it off before because it was going wild.
I have now turned it on for my own comments to see what it does to my inbox. I might have to turn if off again.
Let me know if this issue continues.
Wolf, are you sticking to the stance that the balance sheet can not go below , I think you said 5.6 Trillion?
What does Warsh have in mind? Below that?
I said that first about 3 years ago or so, but the minimum balance sheet is a moving target, just like nominal GDP, driven by economic growth and inflation.
My calculation was based on the Fed remaining within its “ample reserves regime.”
If it abandons that and goes back to a demand-based regime, the balance sheet can go lower because reserves can be lower than $3 trillion. If reserves can be $1.5 trillion, the Fed could reduce its current balance sheet by about $1.5 trillion. So that takes it close to $5 trillion today. But five years from now, that figure will have moved on with inflation and nominal economic growth, and it might be $6 trillion.
The concept of a moving target is really important. The Fed’s balance sheet has ALWAYS grown roughly in line with inflation and the nominal economic growth. That makes total sense.
The two other big liabilities on the balance sheet are demand-based, and they’re growing roughly with the nominal economy and inflation, and they have already done that in the three years since I first said that:
1. The government’s checking account (TGA) whose “desired level” is now $900 billion and that will be moved to $1 trillion soon; the Fed doesn’t control the TGA balance; the Treasury does.
2. and currency in circulation (paper dollars), now $2.4 trillion, such under mattresses in South America, based on demand by consumers and drug dealers around the world.
SO if the Fed keeps its balance sheet level for years, while the TGA keeps rising and currency in circulation keeps rising, then reserves would keep shrinking. This is a form of soft QT, and you can see how the Fed shrank reserves after QE ended in 2014. Five years from now, if we get lots of nominal economic growth and inflation, that $5 trillion minimum may have become $6 trillion. Everything is a moving target.
Mr. Wolf writes: “…Inspector General for the Federal Reserve to “scrutinize the building cost overruns.”” (Context: Mr. Wolf’s article that the investigation is being dropped).
How about my housing (building) cost overrun thanks to Powell’s purchase and the Federal Reserve balance sheet’s “deathgrip” on Mortgaged Backed Securities (MBS).
2.5 BILLION for a building just shows the Fed’s own disregard for the dollar.
IMO
These people do live in a bubble. They dont live normal lives, grocery shop, et.
Does the Fed even need a building? Does the country even need a Fed (the way it has come to operate since 2009?)
The White House ballroom, a small project compared to the three huge historic Fed buildings that were completely upgraded and renovated, is now estimated to cost $400 million. The construction costs already DOUBLED from the original $200 million. That’s 100% cost-overruns. And they got barely started with the work. At this pace, the construction cost overruns will take it to $800 million before it’s finished, for just a ballroom. Where’s the DOJ?
“the ballroom’s cost will be paid for by private donations”
No DOJ needed!
Until we consider the conflicts of interest this creates….
Is Thom Tillis my hero? His comments are so logical, I don’t expect them from a elected official.
Is there a chance I’ll have a political party again (I’m a true neoliberal fiscal conservative that doesn’t give a damn what you do at your own home)?
LOL just read on his wiki he won’t seek re-election due to harassment over the deficit reckless OBBB. Of course.
He can be logical now because he has nothing to lose; he’s outa there. He’s leaving.
Another argument for term limits!
Wolf, I’m happy to stipulate that Powell has a terrible record as Fed chairman, what with the insanely inflationary policies he (and his predecessors) initiated and then stuck with, for far too long.
That said, both he and Senator Tillis are surely not foolish enough to imagine that Pirro will hesitate to reopen her sordid investigation the moment Powell agrees to leave. Unless the bad faith effort to prosecute Powell is properly put to rest, the Trump administration’s backtracking in this case is nothing more than an obvious act of deception.
I doubt either Tillis or Powell are simple-minded enough to believe that Pirro has genuinely given up on her politicized attempt at prosecution. My expectation is that they’re both clear-eyed enough to demand DOJ assurances that this sham investigation will not be restarted as soon as Powell agrees to leave.
This assurance might take the form of a grant of immunity, a presidential pardon, or some other enforceable legal commitment (absent new and dramatic developments, which there’s no real reason to expect) to drop an investigation that everybody has understood from the start to be purely political in nature.
I hate the modern trend of using the criminal process as a weapon, but we lost that battle back when Martha Stewart and Scooter Libby were prosecuted on trumped up “making false statements” charges.
Conducting investigations for the sake of conducting investigations, in the hope that somewhere along the line, someone will tell a lie about something, even if it’s not related to any crime, is a course of action worthy of a totalitarian country.
Whatever they do with Powell after he leaves the Fed doesn’t matter to me and is not the issue. They can tar and feather him after he leaves, as far as I’m concerned. What matters is whether or not Warsh gets to be chair in May, and whether or not Miran has to bow out (if Powell refuses to leave the Board), or if Miran can stay (if Powell bows out in May).
It may not matter to you, Wolf, but “whatever they do with Powell” matters very much to Powell (and to Tillis, I would hope).
My point remains: to the extent the DOJ leaves open its option to renew Powell’s legal jeopardy, he may choose not to resign, and Tillis (assuming he doesn’t lose track of his spine) may not be persuaded, yet, to confirm Warsh.
Put another way, it’s not, in my opinion, a question of what “they do with Powell after he leaves”; rather, it’s a question of whether this “temporary cessation of legal hostilities” will be enough to move the nomination forward, as you (and many others) believe.
You may be right, of course; Tillis may now be willing to confirm Warsh. I’m simply anticipating that this may not happen, as he and Powell react to the none-too-clever equivocating in which Pirro is engaging.
We’ll find out, I guess.
Trump will make Powell an offer he can not refuse. Of course. 😆
Looking forward to wider credit spreads. It’s about time.
So all of this sounds great, but why was he Trump’s pick then? He literally tried to throw Powell in jail for not cutting rates.
And I get that long term rates are set by the bond market, but I’m curious had there ever been a time when they really significantly diverged? If the rates are disconnected why does the market respond so dramatically to fed rate cuts?
I feel it’s unlikely we get a fed funds rate of 1% and then a 10yr rate of 5%
How do you figure it reacts so dramatically? The 10 year has gone up a lot since the Fed dropped the FFR
It looks like it’s bounced between 4 and 4.5% the last two years. No seeing any substantial divergence. But not saying it’s not possible. I’m actually curious what’s the widest spread ever been between the fed funds rate and the 10 yr?
Like could they actually cut to 1% and drive the 10 yr up to 5 or 6%?
Also will it really go up? Investor demand isn’t really wavering the US is still the best of a lot of bad options for govt bonds
The St Louis Fed’s web site publishes thee spread between the 10-year and FFR. It looks like the peak was in 1992 at a 4.04% spread.
So the scenario you laid out, a 1% FFR and a 5% FFR, seems plausible, although in December 1992, it was 3% and 7%, respectively.
The last 3 Fed chairs have been historical disasters. They have all been MMT dabblers at minimum. Wish them well in their retirement.
Warsh says the right things. But once he’s in the hot seat I almost expect him to come up with reasons to continue the Bernanke – Yellen – Powell sequence of massive policy errors and most importantly enable limitless federal government spending.
This country needs someone to be a mature adult, and great leader at the same time. So far none have emerged.
THE US CAN NEVER GO BANKRUPT, BUT HAS BEEN INSOLVENT FOR MANY DECADES NOW DUE TO MASSIVE OVERSPENDING AND IS NOW MORE THAN $40 TRILLION IN FEDERAL DEBT. THAT HAS NOTHING WHATSOEVER TO DO WITH THE FEDERAL RESERVE AND 100% TO DO WITH CONGRESS.
Sounds like something that Jerome “Not My Job” Powell would say.
Seriously though, the Federal Reserve, through all kinds of stupidity, has been right in the middle of the spending spree. ZIRP. Mortgages. QE1. QE2. QE3. QE infinity. According to google AI – which is probably hallucinating or whatever –
“The Federal Reserve monetizes government debt by buying U.S. Treasury securities on the open market, creating new electronic money to pay for them. This process increases the money supply and provides cash to the financial system, effectively financing government spending without relying on tax revenue or borrowing from investors
So I gotta disagree with your take on this one. Even if it is in all CAPs.
The Federal Reserve DOES NOT MONETIZE the Federal debt at all.
It effectively did during QE when it bought bonds and remitted the interest it got paid by the government back to the government; those bond purchases created bank reserves (money). So it converted government debt into bank money = monetize.
Just because it bought those bonds through its primary dealers from the market and not directly from the government makes no effective difference. It’s not even a fig leaf. The effect is the same. And the Fed does buy bonds directly from the government to replace its maturing bonds.
The fact that it shed some of those bonds under QT means that it de-monetized that part of the government’s debt.
Congress indulges the lobbies. Almost no one talks about it. Healthcare, for example, could be better, universal, and 2/3 less expensive.
Good summary of the facts. If we could only get the mainstream media to report it correctly.
FT: Warsh says he wants the fed to adopt a new-approach to measuring inflation
This is a major red flag for me. The Federal Reserve has already moved the goal posts enough times, most notably switching from CPI (the most commonly cited inflation metric) to PCE in the early 2000s. Conveniently, PCE runs lower than CPI about 90% of the time. Now he wants to switch to an even lower “trimmed mean” metric than strips away outliers.
Your statement is a simplistic clickbait interpretation of a headline. It’s not what Warsh said.
1. Now PCE runs a LOT higher than CPI thanks to CPI’s asinine manipulation of OER which weighs 26% in CPI. All of housing weighs 33% in CPI. In PCE, all housing is a much smaller weight, around 15% of PCE, and PCE covers many other products and services that CPI does not cover, and so is far broader than CPI.
2. Both inflation measures, CPI and PCE but PCE less so, are seriously screwed up by the OER measure.
3. Both inflation measures, CPI and PCE, are seriously screwed by the absurd health insurance “chickenshit” measure, as I call it, google it.
==> so improving the inflation measures would be a good thing. His proposal includes getting the BLS to collect data on “a billion prices” from both public and private sources — maybe also on HOA fees, homeowner’s insurance, property taxes, and cost of repairs and maintenance (which are now excluded), and take out OER, no? Improving data quality is one part that Warsh was talking about.
==> he expressed frustration with the month-to-month big ups and downs that the Fed is supposed to react to. Everyone is frustrated with that.
==> the other part Warsh was talking about is including “trimmed mean” inflation measures. These types of measures are already out there, such as the Cleveland Fed’s “16% Trimmed-Mean Consumer Price Index” or “Median PCE Inflation” index (which ran higher than PCE inflation from Dec 2022 through December 2025 and over the past two months has been running right at PCE inflation), or the Dallas Fed’s Trimmed Mean PCE inflation rate (which runs a lot lower).
All “trimmed” inflation indices try to see “underlying inflation” by excluding the outliers of all kinds, up and down. They do NOT pretend that this is the inflation rate; these measures are a TOOL TO UNDERSTAND UNDERLYING INFLATION. They’re not designed to be used for a 2% inflation target, and they say that because they’re not an overall inflation measure. But they can indicate trends of underlying inflation.
Other central banks, including the Bank of Canada, have “trimmed mean” inflation indices in their toolbox.
What Warsh said in essence is that he would be looking at the whole range of inflation measures to understand inflation trends.
He didn’t provide specifics, so we don’t know what else he wants to do. But if he wants to go shopping for an inflation index that would be lower than PCE and use that for the 2% inflation target, that would be “moving the goalposts,” and that would not be good. But that’s not what he said.
Thanks for this!
Warsh now has a built in excuse to lower rates. He could go back to the “this inflation is now transitory,” because of the high energy prices due to the Iran war. And it is putting the economy at risk. Therefore we lower 1/4.