Is the next Fed chair a true QT threat?

Investors worried about aggressive quantitative tightening under the new Federal Reserve leadership may be getting ahead of themselves, according to Dario Perkins of TS Lombard.

While incoming Fed Chair Kevin Warsh has been an outspoken critic of quantitative easing and has repeatedly discussed “reducing the Fed’s footprint,” Perkins argued in a Thursday note that the threat of significant balance sheet reduction shouldn’t be taken too seriously.

The concern stems from statements by multiple members of the Federal Open Market Committee—including Michelle Bowman, Stephen Miran, and Lorie Logan—who have expressed interest in returning to the pre-2008 operating system, where the central bank maintained reserve scarcity rather than the current floor system. Fed Governor Miran submitted his resignation last week.

Investors fear a repeat of 2019, when QT efforts triggered market turmoil as banks struggled to operate without their accustomed excess reserves.

But Perkins sees several reasons for skepticism. There is currently no FOMC consensus for shrinking the balance sheet, and Warsh would likely avoid actions threatening financial stability early in his tenure.

“We also think many pundits are taking Warsh’s views about the Fed’s ‘footprint’ too literally,” Perkins wrote, suggesting the rhetoric is largely “virtue signalling” that could manifest through lower-risk reforms—fewer press conferences, abandoning the dot plot, or scaling back speeches on inequality and climate change.




TS Lombard

https://www.msn.com/en-us/money/markets/is-the-next-fed-chair-a-true-qt-threat/ar-AA23K3BS