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Fed’s Use of Balance Sheet Wasn’t Unconventional, Says New York Fed’s Williams

(Bloomberg) -- Federal Reserve Bank of New York President John Williams argued against the idea that central banks are resorting to unconventional tools when they seek to influence the economy through balance sheet policies.

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Williams, in remarks prepared for an event in Amsterdam on Friday, said monetary policy is commonly understood through “the overly narrow lens” of setting short-term interest rates.

“By implication, other monetary policy actions that have been used — such as forward guidance and balance sheet policies — are deemed ‘unconventional,’ and therefore somewhat suspect,” he said.

“This narrow understanding of monetary policy is alien to the history of monetary economics and central bank practice,” he said.

The remarks come as the Fed has faced criticisms from some corners this year for its use of asset purchases and the overall size of its balance sheet, which currently stands at roughly $6.6 trillion.

In a recent essay, Treasury Secretary Scott Bessent said the Fed’s use of “large-scale asset purchases as a tool of monetary policy” in the wake of the 2007-08 financial crisis — when short-term interest rates were near zero — created market distortions and “disturbed” the Fed’s independence. He characterized the purchases as “unconventional policy instruments.”

Former Fed Governor Kevin Warsh, who is among the candidates President Donald Trump is considering to be the central bank’s next chair, has argued similarly. Warsh has long criticized the Fed’s multiple bond-buying programs, especially those conducted outside of financial crises, and has said in recent months that the Fed should shrink its balance sheet.

Williams on Friday pointed to economic research that describes how policies like asset purchases can be effective even when short-term rates are very low.

“These are not ‘emergency,’ ‘crisis’ or ‘break-the-glass’ policies, but those that are well within the long tradition of monetary theory and practice,” Williams said.

“Of course, how and when to use policies depends on the circumstances and the risks policymakers are facing,” he added. “But this is a matter of tactics and implementation, not of principle or strategy.”