Vice Chair Quarles ’ Stigma Problem

George SelginSpeaking to NYU ' s " Money Marketeers " last week, Randy Quarles, the Fed ' s Vice Chair for Supervision, shared his views on Fed policy, and particularly on steps he thinks the Fed should take to reduce the size of its balance sheet.Perhaps better than anyone else at the Fed, Mr. Quarles understands the role that liquidity requirements play in propping-up banks ' demand for excess reserves, and how those requirements foiled the Fed ' s attempt to get the quantity of such reserves substantially below its crisis-era peak.Rather than accept that defeat, Mr. Quarles wants the Fed to try again, after first taking steps he believes capable of reducing banks ' demand for reserves. Reducing the Fed ' s balance sheet, he says, is worth the effort because it will ultimately make its policies more credible:Although I fully support the FOMC ’s current plan to purchase Treasury bills and increase the size of the balance sheet in the very short term, over the longer-term, I believe that the viability of balance sheet policies is enhanced if we can show that we can meaningfully shrink the size of the balance sheet relative to gross dome stic product following a recession-induced balance sheet expansion. In effect, I believe that balance sheet policies are more credible if we can show that there is not a persistent ratcheting-up effect in the size of the Fed’s asset holdings.Abundant, but Finite, ReservesThe danger to which Mr. Quarles refers, if only vaguely, is one that ...

Source: Cato-at-liberty - February 13, 2020 Category: American Health Authors: George Selgin Source Type: blogs