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House task force hears economists on Fed balance sheet risks, QE effects
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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 capacity to count in liquidity measures.
Dr. Jim Klaus, identified in testimony as a senior fellow with an economics institute, emphasized the Fed's shift to an ample-reserves regime and warned that composition still needs work even if the overall size has stabilized. He described the Fed's assets as "largely US Treasury securities and Agency MBS securities" and cautioned that eliminating interest on reserves would not reliably boost remittances to the Treasury and could force disruptive sales of holdings.
Dr. Allison Schrager, a senior fellow at a public-policy institute, focused on the distortionary effects of large-scale purchases of long-term securities and mortgage-backed securities. She said the Fed's pandemic-era purchases were unprecedented in scale and argued those interventions can misprice risk, create asset misallocations and threaten independence if used routinely.
Dr. Bill English of Yale School of Management highlighted implementation choices and the importance of clear communication from the Fed when it conducts reserve-management purchases. He said recent Fed statements made clear the aim was to buy short-term Treasury bills "to maintain an ample supply of reserves on an ongoing basis," not to pursue QE-style accommodation.
Witnesses proposed several policy options. Nelson recommended three steps to reduce reserve demand: modestly raise overnight market rates above the interest-on-reserves rate to encourage banks to economize on reserves; use temporary open-market operations to smooth predictable reserve-supply volatility; and reform liquidity regulations to recognize discount-window capacity so banks can rely on it without distorting balance sheets. Klaus and Schrager warned against rapid, wholesale abandonment of the ample-reserves framework without a clearer understanding of modern reserve demand.
The panel also discussed market indicators of distortion (bid-ask spreads, dealer capacity) and the practical limits of returning to pre-2008 balance-sheet size. Several witnesses said outcomes would depend on the nature of future shocks and that the balance sheet's path ‘‘ratchets'' upward once expanded during crises.
The hearing ended with the task force asking for written follow-ups; witnesses were asked to submit responses by Feb. 18, 2026.
