Powell's debut "sharp Sword": establishment of a special group to review a $6.7 trillion balance sheet, speculation on the Federal Reserve's "tapering" agenda.

New Fed Chair Kevin Wash made his debut on Wednesday by announcing the establishment of a special working group to review the central bank's balance sheet, which has reached $6.7 trillion in assets. This is his first step in addressing a long-standing policy issue that has been criticized. Wash said at a press conference after the Federal Open Market Committee (FOMC) decision on Wednesday that one of the independent working groups he is assembling will "evaluate the risks and returns under the current ample-reserve regime and examine the composition of the balance sheet." On the same day, the FOMC decided to keep the federal funds rate target range unchanged at 3.5% to 3.75%. Focusing on the balance sheet further raises questions about the extent of action the Fed under Wash's leadership might take. Wash has previously advocated for a substantial reduction in the central bank's balance sheet, which has expanded sharply during multiple rounds of asset purchases during the global financial crisis and the COVID-19 pandemic. The Fed's balance sheet peaked at around $8.9 trillion in June 2022, compared to just $800 billion nearly twenty years ago. Wash stated that the working group will begin its work in the coming weeks, with "most or all of the working groups completing their reviews by the end of the year." The group responsible for the balance sheet review will examine whether "monetary policy ultimately comes from interest rate tools or from balance sheet tools." This timeline further strengthens the expectation on Wall Street that the process of transitioning to a smaller balance sheet will take several years and policymakers are unlikely to prioritize this issue later this year - they still need to deal with more pressing operational matters. Gregory Goldberg, head of US rate strategy at TD Securities, said, "Wash is trying to create momentum by committing to seriously examining significant issues, which is commendable for a new Fed Chair. But ultimately, the Fed still needs to bring inflation back to target levels, which means they will need to send hawkish signals in the near term while also reconsidering these major issues." There is a divergence among Fed officials on whether to raise rates this year. The latest projections from policymakers show that 9 officials expect to raise rates at least once by the end of the year (25 basis points), with 6 expecting at least two hikes; while 9 expect to remain unchanged or cut rates. The Fed suddenly halted its balance sheet reduction (quantitative tightening) at the end of 2025, instead injecting reserves back into the financial system by purchasing US treasury bills maturing within a year. In December of last year, the Fed began purchasing around $40 billion in short-term treasury bills every month to alleviate pressure building in short-term rate markets. Then-Chair Jerome Powell stated that the Fed was "front-loading" bond purchases to ensure an ample supply of reserves ahead of the tax season in April. In April of this year, the Fed significantly reduced the size of its reserve management purchases to $25 billion, exceeding market expectations - policymakers had previously suggested that the pace could be slightly more gradual due to uncertainties and other factors. In May, the Fed further reduced purchases to $10 billion, taking the market by surprise once again. The size remained unchanged from June to July. Since the start of bond purchases on December 12th, the Fed has accumulated over $284 billion in short-term treasury bills. However, policymakers have signaled their stance on balance sheet policy. The FOMC adjusted the language in its policy implementation notes on Wednesday to reflect instructions to the New York Fed to "increase treasury purchases at the appropriate time." Steven Zeng, a strategist at Deutsche Bank, said, "Introducing conditional language for balance sheet expansion is the first step, which sends a fairly strong signal about their policy direction on this issue."