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House task force hears economists on Fed balance sheet risks, QE effects
Summary
Economists testified to a House task force about how the Federal Reserve's enlarged balance sheet and its composition — particularly holdings of long-term Treasuries and agency mortgage-backed securities — could distort markets, expose taxpayers to interest-rate risk and heighten political pressure on the Fed.
Economists testifying before a House Financial Services task force on the Federal Reserve's balance sheet said the size and composition of central-bank holdings matter for market functioning, taxpayer risk and the institution's political vulnerability.
Dr. Bill Nelson, chief economist at the Bank Policy Institute, told the panel that while both scarce- and ample-reserve systems can deliver interest-rate control in normal times, a persistently large, effectively unbounded balance sheet increases political pressure and shifts interest-rate risk to taxpayers. "No," Nelson said when asked if a floor system was unambiguously superior. He urged changes that would incentivize banks to economize on reserves and regulatory adjustments to allow discount-window…
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