Jerome Powell has been a friendly neighbourhood Fed Chairman to the White House, despite the criticism and insults President Trump has levelled against him. That’s because while Powell may not have yielded to pressure from the White House to lower the base rate, the Fed, under his direction, has dutifully continued to buy Treasury debt.
The central bank, as a lender to the federal government, gives Powell visibility over the nation’s fiscal trajectory, as well as the fact that government borrowing impacts the Fed’s mandate. The U.S. has accumulated $38.5 trillion in national debt under both Democratic and Republican administrations—a matter he says is “past time to get back to an adult conversation among elected officials about.”
That said, Powell has never stood in the way of government spending: The Fed’s balance sheet, since the Great Financial Crisis of 2008, has ballooned. Currently, it is running at 24.6% of GDP. Historically, it has sat between 10% and 20%.
Fed nominee Kevin Warsh wants to change that: He believes the Fed should run a smaller balance sheet, reducing the distortions it causes in markets as a result. Therein lies the snag: A reduced balance sheet means fewer assets, and the Fed’s largest holding is government debt. In theory, if the Fed wants to hold fewer bonds it must sell them to someone else and thus increase their supply in the market. That would push up yields, and making it more expensive for the Treasury to borrow—not something the White House wants from its shiny new Fed chairman.
