(Bloomberg) — Treasury Secretary Scott Bessent said that a key theme of his interviews for the next chair of the Federal Reserve has been simplifying the US central bank, which he indicated has become too complex in how it manages money markets.
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“One of the things in terms of the criteria that I’ve been looking for” has been the interplay of the Fed’s various instruments, Bessent said on CNBC Tuesday. “I realize the Fed has become this very complicated operation.”
Bessent said his final second-round interview with the five candidates to succeed Chair Jerome Powell will be today, and reiterated that President Donald Trump may make his announcement on the nomination before Dec. 25. The administration has previously said the finalists are Fed Governors Christopher Waller and Michelle Bowman, former Governor Kevin Warsh, National Economic Council Director Kevin Hassett and BlackRock Inc. executive Rick Rieder.
The Fed now maintains a so-called ample reserves approach in controlling its policy interest rate, which involves holding a sizeable amount of Treasuries on its balance sheet. As part of the current operating system, it pays interest on the reserves that banks park with it, and for any cash that money market funds temporarily place at the Fed.
“The Fed has taken us into a new regime — what is called ample reserves regime — and it looks like that might be fraying a bit here in terms of whether the reserves are actually ample in the system,” Bessent said.
Policymakers last month decided to halt the contraction of the Fed’s balance sheet as of Dec. 1 in an effort to ensure that liquidity remains “ample.” It had been shrinking its portfolio since June 2022 after its holdings of Treasuries and mortgage securities had soared during the Covid crisis.
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“There are all these facilities and operations, the standing repo facilities, and I think we’ve got to simplify things,” Bessent said. He didn’t specify how he thought the central bank ought to overhaul its current operations.
The Standing Repo Facility allows eligible institutions to borrow cash in exchange for Treasury and agency debt. It has seen regular use in recent weeks, reaching $50.4 billion on Oct. 31 — the most since the tool was made permanent in 2021.
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