Treasury Secretary Besant: Fed's Complexity Must Be Addressed

Besant Highlights Complexity of Fed Operations

During an interview with CNBC, Besant stated, "One of the critical criteria I've been focusing on is the interplay between the various tools that the Fed uses. I've come to realize that the Fed has become an extraordinarily complex institution."

Review of Fed Chair Candidates

Current Fed System

Besant explained, "The Fed has taken us into a new regime – the so-called ample reserves regime – but there seem to be some cracks in that regime in terms of whether reserves within the system are truly ample."

Halting Balance Sheet Reduction

Call for Simplification

Besant stated, "There are now various tools and operations, such as the Standing Repo Facility (SRF), and I believe we must simplify these matters." However, Besant did not specify in detail how the central bank should undertake a comprehensive reform of the current operating model.

The Standing Repo Facility allows eligible institutions to borrow cash against Treasury securities and agency bonds. This facility has been used frequently in recent weeks, with usage reaching $50.4 billion on October 31st – the highest level since the facility became permanent in 2021.

Criticism of Regional Fed Presidents

Besant added, "There is an extremely complex relationship between monetary policy, the balance sheet, and regulatory policy. We repeatedly emphasized in the interviews the nature of this interplay."

The Treasury Secretary also indicated that "it is time for the Fed to recede into the background," but he did not detail the specific actions that should be taken to achieve this. He also hinted that central bank officials may be speaking too frequently.

Besant said, "We need to reduce the redundant speeches from these Fed presidents," and he appeared to be referring specifically to the presidents of the regional Federal Reserve Banks, rather than members of the Federal Reserve Board.

He also expressed disagreement with some of the regional Fed presidents. He added, "The presidents of the regional Federal Reserve Banks are supposed to be people from the areas they represent, but at least three or perhaps four of the regional Federal Reserve Banks have hired people from outside their areas. They don't even live in their areas, but commute back and forth to New York."

The Federal Open Market Committee (FOMC), which is responsible for setting interest rates, is composed of seven members of the Board of Governors and five presidents of the regional Federal Reserve Banks – with the president of the Federal Reserve Bank of New York holding a permanent seat, while the other four rotate. Unlike members of the Board of Governors, presidents of the regional Federal Reserve Banks do not have to be nominated by the White House or confirmed by the Senate. Notably, the current list of presidents of the regional Federal Reserve Banks must undergo a reauthorization every five years by the Federal Reserve Board in February, and Raphael Bostic, president of the Federal Reserve Bank of Atlanta, has announced his intention to resign.

Besant also noted that "members of the Board appear to be inclined to lower interest rates."

Responding to a question about Trump's suggestion earlier this month that he would fire Besant if he did not help push for lower interest rates, Besant replied, "If you had been there at the time, you would have realized that he was joking."