FED FUNDS

The Fed’s balance sheet is $6.7 trillion, composed almost entirely of Treasuries and MBS. Current Fed nominee Warsh wants to reduce it. To do that we must understand the liabilities these assets offset. They include $3 trillion in commercial bank deposits, $2.4 trillion in currency, and $1 trillion in the Treasury checking account. Only bank deposits can be reduced and that means (carefully) reducing bank liquidity. Easier said than done.