U.S. Treasury’s Bessent Says Fed Likely to Move Slowly on Balance Sheet Decisions

Summary

Treasury Secretary Scott Bessent said the Federal Reserve is unlikely to rush decisions about shrinking its balance sheet, even under a potential Fed chair Kevin Warsh. With the Fed still holding trillions of dollars in assets and operating under an ample-reserves system, any major shift could take at least a year, reflecting caution around financial stability and interest-rate impacts.

WASHINGTON, Feb 8 — U.S. Treasury Secretary Scott Bessent said he does not expect the Federal Reserve to rush into major changes to its balance sheet, even if Kevin Warsh — a longtime critic of large-scale bond holdings — becomes the next Fed chair.

Speaking on Fox News’ Sunday Morning Futures, Bessent emphasized that decisions about the central bank’s asset holdings will remain firmly in the Fed’s hands and suggested that any significant shift could take considerable time.

“I wouldn’t expect them to do anything quickly,” Bessent said. He noted that if the Fed continues operating under an “ample reserves” framework — a system that relies on abundant liquidity in the banking system — it would require maintaining a relatively large balance sheet. “They’ll probably sit back, take at least a year to decide what they want to do.”

Balance Sheet Still Historically Large

The Federal Reserve dramatically expanded its balance sheet during the 2008 global financial crisis and again during the COVID-19 pandemic, purchasing massive amounts of U.S. Treasury bonds and mortgage-backed securities to keep long-term borrowing costs low. The Fed’s holdings peaked at around $9 trillion in 2022.

Since then, the central bank has allowed assets to roll off through quantitative tightening (QT), shrinking the balance sheet to roughly $6.6 trillion by late 2025. However, in December, the Fed resumed limited Treasury bill purchases for technical reasons, aiming to ensure sufficient liquidity in money markets and maintain firm control over short-term interest rates.

Warsh’s Views Add Policy Intrigue

Warsh, a former Fed governor, has argued that the central bank’s large bond portfolio distorts financial markets and should be reduced more aggressively. Speculation over his potential appointment has fueled debate over whether the Fed could adopt a tougher stance on balance sheet reduction.

Bessent, however, underscored that Warsh would operate independently if confirmed, signaling no expectation of immediate or politically driven changes to monetary policy.

Mortgage Rates and Financial Stability in Focus

President Donald Trump has repeatedly called for lower mortgage rates, a goal that could clash with faster balance sheet reduction. Economists warn that shrinking the Fed’s holdings too quickly could push up long-term interest rates and risk destabilizing financial markets.

Bessent’s comments suggest the administration expects a gradual, cautious approach from the Fed, balancing inflation control, market stability, and borrowing costs.

FAQs

Q1. What is the Fed’s balance sheet?

It refers to the assets the Federal Reserve holds, mainly U.S. Treasury bonds and mortgage-backed securities used to influence financial conditions.

Q2. Why did the Fed expand its balance sheet so much?

The Fed purchased large amounts of bonds during the financial crisis and the pandemic to lower long-term interest rates and support the economy.

Q3. What is quantitative tightening (QT)?

QT is the process of reducing the Fed’s balance sheet by allowing bonds to mature without replacement, which can tighten financial conditions.

Q4. Why might the Fed move slowly now?

Maintaining an ample-reserves system requires a sizable balance sheet, and moving too quickly could disrupt markets or raise borrowing costs.

Q5. How does this affect mortgage rates?

A faster reduction in the Fed’s bond holdings could push up long-term interest rates, including mortgage rates, making the issue politically and economically sensitive.