Bescent: The Federal Reserve may not quickly reduce its balance sheet

U.S. Treasury Secretary Becerra stated on Sunday that even in the case of the nomination of Walsh, who previously criticized the central bank's bond-buying program, he does not believe the Federal Reserve will quickly take action to reduce its balance sheet.

According to Reuters, Becerra pointed out on Fox News Channel's "Sunday Morning Futures" program that the Federal Reserve may need up to a year to make decisions regarding its balance sheet. This statement provides the market with key policy expectation guidance, suggesting that the monetary authority will adopt a cautious and wait-and-see approach to balance sheet management.

Becerra emphasized that the adjustment of the balance sheet depends on the Federal Reserve's own willingness, and if it shifts to a "ample (reserve) mechanism" policy, it will actually require maintaining a large balance sheet size. He expects that the Federal Reserve "may take a step back first, spending at least a year deciding what they want to do," indicating that the likelihood of a rapid acceleration or sharp turn in large-scale quantitative tightening in the short term is low.

These remarks come at a time when the market is focused on potential policy changes brought about by the new Federal Reserve chair nominee. Although Walsh had previously advocated for reducing the Federal Reserve's holdings, the Treasury Secretary's latest statement alleviated concerns about a rapid tightening of monetary policy that could impact market liquidity. Experts analyze that President Trump hopes to significantly lower mortgage rates, and aggressive balance sheet reduction would run counter to this goal, making it difficult to achieve while maintaining financial stability.

Cautious Policy Path and Timeline

Becerra made it clear that Walsh would be a very independent Federal Reserve chair, and the specific operations regarding the balance sheet would be entirely decided by the Federal Reserve. However, he also provided a relatively clear expectation management, stating that no quick actions should be anticipated.

Becerra pointed out that if the Federal Reserve decides to adopt the so-called "ample (reserve) mechanism" policy, this would structurally require the central bank to maintain a large balance sheet. Based on this logic, he speculated that Federal Reserve decision-makers might choose to remain on hold temporarily, "spending at least a year" to review and plan future paths. This timeline provides investors with a longer buffer period to assess the future liquidity environment.

Evolution of the Federal Reserve's Balance Sheet

Looking back at historical data, the Federal Reserve's balance sheet expanded significantly during the global financial crisis and the COVID-19 pandemic, aimed at lowering long-term interest rates. The size peaked at $9 trillion in the summer of 2022. Subsequently, the Federal Reserve initiated a process known as quantitative tightening, allowing its held assets to mature without reinvestment, reducing the balance sheet size to $6.6 trillion by the end of 2025.

However, in December of last year, the Federal Reserve began to increase its bond holdings again through technical operations involving the purchase of Treasury bills. This move aims to ensure that the financial system has ample liquidity, thereby effectively controlling its target interest rate range. This recent action indicates that maintaining stable system liquidity has become an important consideration in the Federal Reserve's current operations.

Balancing Nominee's Position and Policy Goals

One of the focal points of market attention is the policy inclination of Federal Reserve chair nominee Walsh. Walsh served as a Federal Reserve governor from 2006 to 2011, and he argued that the Federal Reserve's large asset holdings distort financing conditions in the economy and advocated for a significant reduction in the current holdings However, this hawkish stance faces real challenges. According to Reuters, experts point out that U.S. President Trump has expressed a desire for mortgage rates to decline significantly. Reducing the Federal Reserve's balance sheet typically puts upward pressure on long-term rates, which not only hinders the achievement of lower mortgage rate targets but also makes it difficult to do so while maintaining financial stability. Bessent's remarks suggest that under multiple policy objectives and real constraints, even with Walsh taking office, an aggressive balance sheet reduction plan may give way to a more prudent strategy.