Question A:
If the Federal Reserve under Kevin Warsh were to reduce its balance sheet by at least $1 trillion over the next 12 months, it would measurably improve the functioning of financial markets over his four-year appointed term as chair.
Responses
Responses weighted by each expert's confidence
Question B:
If the Federal Reserve under Kevin Warsh were to provide substantially less forward guidance and communication than it has done in the recent past, it would measurably improve the functioning of financial markets over his four-year appointed term as chair.
Responses
Responses weighted by each expert's confidence
Question A Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
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 Viral Acharya |
NYU Stern | Bio/Vote History | ||
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It will no doubt depend on how the balance sheet is shrunk, and if not done right, interim liquidity risks could be difficult to manage... but broadly the idea should help remove private sector's addiction to surplus and always available liquidity, reducing exessive leverage/risk
-see background information here -see background information here |
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 John Campbell |
Harvard | Bio/Vote History | ||
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There are reasons to shrink the Fed's balance sheet when the economy is strong and the zero lower bound on the nominal interest rate is not binding - for example to allow an increase when these conditions change. But the impact on financial market functioning is hard to assess.
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 John Cochrane |
Hoover Institution Stanford | Bio/Vote History | ||
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We are in the ample reserves regime, where reserves and treasurys are perfect substitutes. At most, if constraints start to bind, reducing the balance sheet deliberately throws sand in the wheels.
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 Douglas Diamond |
Chicago Booth | Bio/Vote History | ||
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Shrinking the balance sheet needs to be coordinated with the status of liquidity provided by banks in the repo market. This interacts with bank capital regulations.
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 Wenxin Du |
HBS | Bio/Vote History | ||
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 Darrell Duffie |
Stanford | Bio/Vote History | ||
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It would take longer than 12 months to reduce the demand for reserves by $1 trillion. Forcing this would therefore cause major turmoil in money markets.
-see background information here |
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 Andrea Eisfeldt |
UCLA Anderson | Bio/Vote History | ||
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Reducing the balance sheet by 1TR over a 12 month period could constitute a large supply shock to bond markets. It is not clear that such a supply shock would be absorbed without any impact on the level and volatility of rates. It could also impact money market functioning.
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 Eugene Fama |
Chicago Booth | Bio/Vote History | ||
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 Xavier Gabaix |
Harvard | Bio/Vote History | ||
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 Itay Goldstein |
UPenn Wharton | Bio/Vote History | ||
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 John Graham |
Duke Fuqua | Bio/Vote History | ||
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 Campbell R. Harvey |
Duke Fuqua | Bio/Vote History | ||
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While I agree that the $6.74t balance sheet should be significantly reduced in size, a 15% reduction in the Fed balance sheet would unlikely have a measurable effect.
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 Harrison Hong |
Columbia | Did Not Answer | Bio/Vote History | |
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 Wei Jiang |
Emory Goizueta | Bio/Vote History | ||
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 Steven Kaplan |
Chicago Booth | Bio/Vote History | ||
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Likely to be helpful, but still uncertain.
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 Anil Kashyap |
Chicago Booth | Bio/Vote History | ||
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I don't see the evidence that the current size is causing problems, plus it could shrink its footprint by changing the duration of the portfolio.
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 Arvind Krishnamurthy |
Stanford GSB | Bio/Vote History | ||
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$1trillion reduction probably leaves the banking system with excess reserves, although there is uncertainty about the floor. I also dont think it will affect secondary markets for Treasurys appreciably. A new task-force strategy around balance sheet policy could have an impact.
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 Camelia Kuhnen |
UNC Kenan-Flagler | Bio/Vote History | ||
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 Michelle Lowry |
Drexel LeBow | Bio/Vote History | ||
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 Sydney Ludvigson |
NYU | Bio/Vote History | ||
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 Matteo Maggiori |
Stanford GSB | Bio/Vote History | ||
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Much world depend on doing this in an orderly fashion, on the market conditions, and on the path of conventional monetary policy. The benefits might materialize at horizons longer of 4 years.
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 Loretta Mester |
UPenn Wharton | Bio/Vote History | ||
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To reduce the balance sheet by this much would require reducing banks’ demand for reserves. If this were done in a way that increased risks to financial stability it would not be productive.
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 Tobias Moskowitz |
Yale School of Management | Did Not Answer | Bio/Vote History | |
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 Tyler Muir |
UCLA Anderson | Did Not Answer | Bio/Vote History | |
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 Stefan Nagel |
Chicago Booth | Bio/Vote History | ||
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perhaps some benefits (improved price discovery for LT Treasuries?), but also higher risk of money market disruptions like in September 2019. Benefits could also be realized without these negatives by shifting assets to T-bills rather than shrinking balance sheet.
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 Dimitris Papanikolaou |
Northwestern Kellogg | Bio/Vote History | ||
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 Jonathan Parker |
MIT Sloan | Bio/Vote History | ||
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During the period of ample reserves, banks interact with the Fed, rather than through interbank markets/networks. It would take time to re-build these. So doing this in one year risks temporary disruptions. I see no benefits, (Maturity mismatch is a different issue than size.)
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 Christine Parlour |
Berkeley Haas | Bio/Vote History | ||
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 Thomas Philippon |
NYU Stern | Bio/Vote History | ||
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 Manju Puri |
Duke Fuqua | Did Not Answer | Bio/Vote History | |
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 Michael R. Roberts |
UPenn Wharton | Bio/Vote History | ||
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 Paola Sapienza |
Hoover Institution Stanford | Bio/Vote History | ||
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Depending on how the change will be implemented, it could be a positive change, but it does not seem to me that the advantage will have something to do with the “functioning” of the financial markets. That does not mean that the change is not desirable. More details are needed.
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 Amit Seru |
Stanford GSB | Bio/Vote History | ||
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 Robert Stambaugh |
UPenn Wharton | Did Not Answer | Bio/Vote History | |
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 Laura Starks |
UT Austin McCombs | Did Not Answer | Bio/Vote History | |
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 Jeremy Stein |
Harvard | Bio/Vote History | ||
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 Johannes Stroebel |
NYU Stern | Bio/Vote History | ||
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 David Thesmar |
MIT Sloan | Bio/Vote History | ||
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$1 tn is about 3% of total debt, so with conventional elasticities one expects bond prices to drop by some 3%, of course, depends on timing, announcement effects etc
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 Sheridan Titman |
UT Austin McCombs | Bio/Vote History | ||
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 Stijn Van Nieuwerburgh |
Columbia Business School | Bio/Vote History | ||
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A smaller Fed portfolio could improve price discovery and trading by returning securities to private markets, particularly in agency MBS. But runoff also drains reserves and increases the amount of Treasuries that dealers and repo markets must finance. IMO first effect dominates.
-see background information here |
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 Nancy Wallace |
Berkeley Haas | Bio/Vote History | ||
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 Toni Whited |
UMich Ross School | Bio/Vote History | ||
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 Haoxiang Zhu |
MIT Sloan | Bio/Vote History | ||
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It could be difficult to reduce Fed balance sheet significantly from the current level without making reserves more scarce and straining liquidity conditions.
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Question B Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
|---|---|---|---|---|
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Viral Acharya |
NYU Stern | Bio/Vote History | ||
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More prudent leverage and risk-taking might restore valuations and financial fragility to levels that are healthier for the financial system in the long run... otherwise, the Fed put keeps getting larger and larger with each new accident in the markets.
-see background information here -see background information here |
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John Campbell |
Harvard | Bio/Vote History | ||
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Forward guidance helps market participants understand Fed policy, provided it is stated in a contingent way ("if this occurs, then we do that") rather than as a commitment to maintain a particular interest rate in the future.
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John Cochrane |
Hoover Institution Stanford | Bio/Vote History | ||
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Agree mildly. While transparency is good, policy by talk and expectations management encourages too much focus on the Fed.
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Douglas Diamond |
Chicago Booth | Bio/Vote History | ||
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Forward guidance did not work well in the 2020s and in any case it is most useful at interest rates near zero. It is useful to reevaluate the policy in any case.
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Wenxin Du |
HBS | Bio/Vote History | ||
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Darrell Duffie |
Stanford | Bio/Vote History | ||
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Andrea Eisfeldt |
UCLA Anderson | Bio/Vote History | ||
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Forward guidance is an additional tool. Not using it is a constraint on the Fed’s toolbox. Markets rely on forward guidance for planning.
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Eugene Fama |
Chicago Booth | Bio/Vote History | ||
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Xavier Gabaix |
Harvard | Bio/Vote History | ||
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Itay Goldstein |
UPenn Wharton | Bio/Vote History | ||
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John Graham |
Duke Fuqua | Bio/Vote History | ||
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Campbell R. Harvey |
Duke Fuqua | Bio/Vote History | ||
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The guidance is mainly for media consumption - and it creates the impression that the Fed has more influence than it does. More or less guidance would have little effect on the functioning of capital markets.
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Harrison Hong |
Columbia | Did Not Answer | Bio/Vote History | |
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Wei Jiang |
Emory Goizueta | Bio/Vote History | ||
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Steven Kaplan |
Chicago Booth | Bio/Vote History | ||
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Anil Kashyap |
Chicago Booth | Bio/Vote History | ||
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Depends on how the void is filled.
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Arvind Krishnamurthy |
Stanford GSB | Bio/Vote History | ||
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I have not seen any evidence that lack of transparency/ambiguity/opacity on central bank rate policy has benefits.
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Camelia Kuhnen |
UNC Kenan-Flagler | Bio/Vote History | ||
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Michelle Lowry |
Drexel LeBow | Bio/Vote History | ||
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Sydney Ludvigson |
NYU | Bio/Vote History | ||
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Matteo Maggiori |
Stanford GSB | Bio/Vote History | ||
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Loretta Mester |
UPenn Wharton | Bio/Vote History | ||
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The Fed needs to provide information on its reaction function: needs to convey its view on future policy conditional on how the economy evolves and not regardless of how the economy evolves. Without this the Fed won’t be able to infer market’s view on econ as Chair Warsh desires.
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Tobias Moskowitz |
Yale School of Management | Did Not Answer | Bio/Vote History | |
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Tyler Muir |
UCLA Anderson | Did Not Answer | Bio/Vote History | |
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Stefan Nagel |
Chicago Booth | Bio/Vote History | ||
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Greater uncertainty about upcoming policy decisions may generate more volatility. On the other hand, some of the communication about future policy in recent years has also lead to confusion. Removing this source of confusion may bring benefits.
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Dimitris Papanikolaou |
Northwestern Kellogg | Bio/Vote History | ||
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Jonathan Parker |
MIT Sloan | Bio/Vote History | ||
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During normal times forward guidance does very little. Guidance that is not state-dependent has a small risk of tying the Feds hands in the future (bad), but can reduce market uncertainty (good). But the Fed can just say it will do what is best to achieve its objectives.
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Christine Parlour |
Berkeley Haas | Bio/Vote History | ||
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Thomas Philippon |
NYU Stern | Bio/Vote History | ||
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Manju Puri |
Duke Fuqua | Did Not Answer | Bio/Vote History | |
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Michael R. Roberts |
UPenn Wharton | Bio/Vote History | ||
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Paola Sapienza |
Hoover Institution Stanford | Bio/Vote History | ||
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Monetary policy should depend on external conditions that the Fed does not always (eg war). Forward guidance is based on the assumption conditions stay the same:. If they do change, the Fed is forced to change guidance and admit surprise. political consequence for doing this.
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Amit Seru |
Stanford GSB | Bio/Vote History | ||
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Robert Stambaugh |
UPenn Wharton | Did Not Answer | Bio/Vote History | |
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Laura Starks |
UT Austin McCombs | Did Not Answer | Bio/Vote History | |
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Jeremy Stein |
Harvard | Bio/Vote History | ||
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Johannes Stroebel |
NYU Stern | Bio/Vote History | ||
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David Thesmar |
MIT Sloan | Bio/Vote History | ||
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The first 20 years of the Great Moderation happened with much less central bank transparency
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Sheridan Titman |
UT Austin McCombs | Bio/Vote History | ||
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Stijn Van Nieuwerburgh |
Columbia Business School | Bio/Vote History | ||
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Literature shows that better communication reduces uncertainty. But we need clearer explanation of reaction function, state-contingency of policy instead of calendar-based guidance, separation of Fed outlook from policy commitment.
-see background information here -see background information here |
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Nancy Wallace |
Berkeley Haas | Bio/Vote History | ||
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Toni Whited |
UMich Ross School | Bio/Vote History | ||
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Haoxiang Zhu |
MIT Sloan | Bio/Vote History | ||
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The Fed cannot commit to future actions anyway because it will ultimately depend on the data. The market understands this constraint and may already discount the Fed's forward guidance at this point.
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