Bubbles And Runs
Experts addressing a conference hosted by the Fed last month, said the central bank Fed could use the assets as a new "macro prudential" tool to deal with financial market bubbles - by cooling particular sectors with targeted asset trades - and ward off investor runs by letting ample bank reserves act as a buffer.
And while the Fed is now replenishing its portfolio as bonds mature and plans to continue doing so for another year or so, policymakers have directed staff to examine alternatives and to consult outside experts, according to minutes of the Fed's July meeting.
For example, Fed researchers have been studying how many and what type of bonds should be stay on the Fed's books in a "post-normalization world" - an effort one source familiar with the work called a "once in a decade" research opportunity.
Ben Bernanke, who as Fed Chairman unleashed the bond-buying that pushed the balance sheet to its current size, also weighed into the debate downplaying any concerns about the Fed's outsized portfolio.
"The Fed could leave the balance sheet where it is and that wouldn't be a problem," he told New York Economics Club last month, noting its size is "internationally normal" in relation to the economy's output.
To be sure, some policymakers and economists still see compelling reasons to shrink the Fed's holdings. James Bullard, president of the St. Louis Fed, said last week it would be "prudent" to bring it to "more normal levels."
One result of the swollen portfolio is the $2.6 trillion in excess reserves that banks now park at the Fed, earning interest that will only rise as rates tick higher.
The idea that the Fed is paying extra billions to the very banks blamed for the crisis could re-ignite criticism from lawmakers already sour on the Fed's aggressive stimulus.
A big balance sheet poses "huge optics problems," says John Cochrane, a senior fellow at the Hoover Institution.