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Today's episode is brought to you by the Fundrise Income Fund. You'll hear more about the Income Fund later in the show, but for now, let's get into today's interview. The new Fed chair Kevin Warsh has made it no secret that he prefers a smaller Federal Reserve balance sheet, perhaps a much, much smaller Federal Reserve balance sheet. The consequences of this range from the mundane to the profound. But what is without question is that in order to reduce the Fed's balance sheet, there needs to be additional tools. I was able to interview someone who's the most in demand expert on this topic. Pr
Great to be back with you, Jack.
I, today, wanna talk about a very specific topic, and I'm gonna set the stage a little bit. So we have a new chair of the Federal Reserve, Kevin Worsch. He has stated a desire to reduce the Fed's balance sheet, something that has been going on since 2022. The issue is that that is a very difficult thing to do, and, basically, the Fed's balance sheet bottomed, last year at, let's see where we are, about $6,500,000,000,000, which sounds you know, is a is a huge number. And since then, it's been very, very modestly growing. And the question is, how is the Federal Reserve going to continue to shri
Terrific. You framed it ex with excellence, Jack, as usual. So in the popular discussion of the Fed's balance sheet size, most people are focusing on the assets. How much how much of these $6,500,000,000,000 of assets does the Fed really need to hold? And couldn't it get rid of some of these assets without blowing up the economy? And actually, that's not the right way to look at it. We should move over to the other side of the balance sheet where the liabilities are because the assets by definition have to be at least as large as the liabilities and it's really hard to squash down the Fed's li
So the big three are the the treasury general account, cash in circulation, and the reserve balances. Treasury general account, not big enough. The cash in circulation, know, the Fed is is is just not gonna happen. The Fed's not gonna send the SWAT team, the military to to to the banks, to people's houses to get all the cash. It's not not gonna happen at all. So the only real channel to reduce it is reducing reserves.
You got it. So starting at and by the way, reserves are actually going up at the moment or have been over the last six months because the Fed discovered late last fall that it had gotten reserves down as low as they could get them, and it had to start growing them again at around 40,000,000,000 a month. By purchasing treasury bills, the Fed can expand the supply of reserves. Again, those are deposits of commercial banks at the Fed, and the banks use them for a number of purposes, most importantly, just to make their daily payments to each other, which are huge. Okay. So you've got around 3,000
And sorry, professor, before we get into that, just if the Fed was to go willy nilly, say, I don't need professor Duffy's four recommendations. I don't need any other recommendations, and they just were to be a net seller of all their assets, what would happen? Talk to us what happened in 2019 and what happened in the last year in terms of the the spreads and stuff.
So what would happen if the Fed said, never mind the liabilities, I'm just gonna reduce the assets? They start selling assets. Now what happens when they sell assets is that the purchases by the private sector of those assets are paid with reserve balances. Those are and that extinguishes those reserve balances. So the 3,000,000,000,000 will go down. For every 100,000,000,000
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