Federal Reserve Chair candidate Warrell: Advocates for a moderate overall balance sheet reduction to 5.8 trillion, supports interest rate cuts becoming a "minority opinion"

Christopher Wall, a member of the Federal Reserve Board, recently stated that the Federal Reserve should have the ability to gradually reduce the level of bank reserves from the current $3.26 trillion to around $2.7 trillion. If the currency held by the Federal Reserve and the balances in the general accounts of the U.S. Department of the Treasury are included in the calculation, the overall size of the balance sheet would decrease from the current $6.7 trillion to $5.8 trillion. As one of the potential candidates for the next chair of the Federal Reserve under President Trump, Wall emphasized that the Federal Reserve should continue to proceed with the balance sheet reduction process, but not as aggressively as some observers and economists have suggested. Speaking at an event hosted by the Dallas Fed, Wall pointed out, "We might be able to continue to reduce reserve balances by letting some securities naturally exit the balance sheet when they mature or are prepaid." He specifically mentioned that determining the minimum level of "adequate" reserves is crucial in assessing the upper limit for balance sheet reduction, as this level directly affects whether the overnight financing market will be disrupted. According to the latest data from the Federal Reserve, the total reserves held by banks in the U.S. amount to $3.26 trillion, and Wall Street strategists estimate that in order to maintain market liquidity and avoid pressure, reserve balances need to be kept within the range of $3 trillion to $3.25 trillion. It is worth noting that Wall advocates for a specific numerical definition of "adequate" reserves, which contrasts with the broader definitions used by institutions such as the New York Fed. The latter tends to retain flexibility to respond to market changes when reserve balances decline. Additionally, Wall reiterated his belief that the federal funds rate is set too high and may support a rate cut at the next Federal Reserve meeting this month. He emphasized that this stance is not driven by political considerations, although it does place him in the minority among his colleagues. The Trump administration has recently called for the Federal Reserve to lower interest rates. Kevin Hassett, Director of the White House National Economic Council, criticized the Federal Reserve on Thursday for being "behind the curve," as it has not adjusted rates in sync with other central banks. Regarding balance sheet policy, some critics believe that the Federal Reserve should restore its balance sheet to pre-financial crisis levels. During the crisis in 2008, quantitative easing policies caused the balance sheet to surge from around $800 billion to over $2 trillion. Potential future chairs, such as Kevin Warsh, also belong to this group of critics. Wall further suggested that the Federal Reserve should increase the proportion of short-term assets in its balance sheet, with long-term securities only used for hedging currency liabilities or representing around half of U.S. debt holdings. In response to the suggestion from some market participants that the Federal Reserve's asset composition should mimic the U.S. bond market, with short-term assets comprising 20%, Wall believes that while this proposal could avoid putting pressure on yield curves, it would extend the duration of the balance sheet and increase the potential risk of income loss for the Federal Reserve, as has been seen in recent years.