By Michael S. Derby
(Reuters) -U.S. Treasury Secretary Scott Bessent said on Tuesday the Federal Reserve’s system of managing interest rates is struggling and needs to be simplified.
“We’ve gotten to this point where monetary policy has gotten very complicated” and the U.S. central bank should “simplify things,” Bessent said in an interview with CNBC.
“The Fed has taken us into a new regime, and what is called ample-reserves regime. And it looks like that might be fraying a bit here in terms of whether the reserves are actually ample,” Bessent said.
The Treasury secretary did not say what he meant by fraying.
The Fed has faced and continues to face challenging money market conditions tied to how it has been managing its $6.56 trillion balance sheet and financial system liquidity levels.
Officials at the Fed’s last policy meeting announced that they would stop the contraction of the central bank’s overall balance sheet at the start of December. They did so as liquidity in financial markets in the run-up to the late October policy meeting tightened enough to complicate control of the federal funds rate, the Fed’s primary tool to achieve its inflation and employment goals.
The turbulence was such that it drove eligible financial firms to borrow notable levels of cash from the Fed via its Standing Repo Facility, a tool used to put a ceiling over short-term interest rates. There were also intermittent large inflows of cash into the Fed’s reverse repo tool, which is used to set a floor underneath money market rates.
CRITIC OF FED BALANCE SHEET
Bessent has been a persistent Fed critic who has expressed particular concern about its large balance sheet, which is primarily stocked with trillions in bonds bought in large part to stabilize financial markets and to provide stimulus to the economy.
The large footprint, at least in dollar terms, is seen by Bessent and others, including some at the Fed, as distorting market pricing levels. There also has been concern about the complex way the Fed manages rates, which relies on liquidity facilities and eschews the highly managed system it used prior to the financial crisis that began nearly 20 years ago.
“A large balance sheet increases the Fed’s footprint in financial markets, distorts the price of duration and the slope of the yield curve, and potentially blurs the line between monetary and fiscal policy,” Kansas City Fed President Jeffrey Schmid said in a speech on November 14.
Others have lamented that managing liquidity under the current system has led the Fed to pay out substantial sums to financial institutions. That approach turned the Fed from an institution that made substantial profits to one that is currently $240 billion in the red, even as those losses have no impact on its ability to operate.
