Fed balance sheet shrinkage threatens repo stability
The guest argued that Kevin Warsh's goal of shrinking the Federal Reserve's balance sheet could trigger a severe liquidity squeeze in the short-term money markets.
The argument
The guest warned that halting Fed Treasury purchases forces the Treasury to sell directly to the public, draining bank deposits. He believes resuming quantitative tightening under current debt loads risks repeating the 2018 repo market blow-up.
The thesis, stress-tested
✓ What validates it
- ✓Spikes in secured overnight financing rates (SOFR) or repo market borrowing costs
- ✓Increased emergency overnight lending interventions by the Federal Reserve
▸ Risks discussed
- ▸The Fed may be forced to abandon quantitative tightening early if market function deteriorates
- ▸Emergency liquidity facilities could mitigate systemic repo spikes
Hear it yourself
"Elsewhere, we got into the Federal Reserve since we are now a week into president Trump announcing Kevin Warsh as his next pick for Fed chair, and we talk about the conflicting visions taking place at the Fed."
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