US President Donald Trump has announced the successor to Jerome Powell, whose term as FED Chairman expires in May.
At this point, Trump nominated Kevin Warsh. While discussions continue about how Kevin Warsh will affect the markets, US Treasury Secretary Scott Bessent made important statements on the matter.
According to Reuters, Scott Bessent, speaking to Fox News, said that even if Kevin Warsh takes office, it could take up to a year for the Fed to decide on shrinking its balance sheet (quantitative tightening: QT).
Bessent stated that it would take at least a year to determine the direction of the Fed’s balance sheet in relation to a change in the reserve regime.
Bessent, also noting that Warsh would be a very independent Fed chairman, said, “How the Fed manages its balance sheet is up to the Fed. The Fed will probably need at least a year to determine its future direction to move away from the current reserve regime.”
As is known, during the global financial crisis and the COVID-19 pandemic, the FED significantly expanded its balance sheet (quantitative easing – QE) to lower long-term interest rates and increased its assets to $9 trillion by the summer of 2022.
Since then, through quantitative easing (QT), it has reduced this amount to $6.6 trillion by the end of last year. Despite this, it is still seen as a historically high level of assets.
Warsh, who served as a FED member from 2006 to 2011, argued that the FED should significantly reduce its holdings. However, President Trump is pressuring the FED to lower interest rates.
In contrast, experts point out that shrinking the Fed’s balance sheet (monetary tightening) tends to raise long-term yields, which is counterproductive. Therefore, it is predicted that a new Fed chairman will find it difficult to continue the balance sheet reduction process.
*This is not investment advice.