Trump allies urge Fed to cut balance sheet

Bond investors may have another reason to worry after Donald Trump's election last week: Some of his allies are not fans of the Federal Reserve's big balance sheet of bonds and want the central bank to shrink it.

They argue that the Fed's debt portfolio has damaged the economy by channeling credit to corporations and the federal government instead of to new, more dynamic small businesses.

The central bank's policies also have hurt savers and retirees, they say.

The Fed's bond purchases 'have been very harmful,” David Malpass, a senior economic adviser on the Trump transition team, said in an email. It 'needs to communicate a plan for downsizing its balance sheet.”

House Financial Services Committee Chairman Jeb Hensarling, who worked closely with Vice President-elect Mike Pence when the latter was a lawmaker, also has called on the central bank to reduce its $4.5 trillion balance sheet.

'It is way past time for the Fed to commit to a credible, verifiable monetary policy rule, to systematically shrink its balance sheet and get out of the business of picking winners and losers in the credit markets,” the Texas Republican said at a June 22 hearing on the central bank's policies.

Bond prices have nose-dived since Trump was elected president on Nov. 8 as investors concluded that his proposals for lower taxes and higher military and infrastructure spending would lead to faster economic growth and increased inflation.

A move to reduce the Fed's bond holdings could put further downward pressure on prices by adding to the supply investors would have to absorb. Fed Chairwoman Janet Yellen may get a chance to address the issue today in testimony to the Joint Economic Committee of Congress.

'The Fed's policies have contributed to the weakness in middle-class income by helping bond issuers, primarily the government and large corporations, at the expense of small businesses and savers,” said Malpass, who is president of Encima Global in New York.

The 'pro-growth solution” would be to encourage bank lending, taper the Fed's bond holdings and hold down the interest rate it pays commercial banks for their excess reserves, he said.

In a Nov. 11 interview on Bloomberg Radio, Trump adviser Judy Shelton echoed Malpass's concerns.

Shelton, who is co-director of the Sound Money Project at the Atlas Network in Washington, D.C., suggested that the Fed's policies were channeling low-cost funding to 'wealthy investors, and corporate borrowers and even big government” instead of to 'the average person with just a bank savings account.”

Trump was critical of the Fed during the presidential campaign, at one point charging that its low interest rates were fomenting a 'big, fat, ugly bubble” in the stock market. He also complained that the central bank had been more political than his Democratic opponent, Hillary Clinton - a charge that Yellen repeatedly denied.

With two slots vacant on the Fed's seven-seat board, Trump will have an opportunity to nominate monetary policy makers more to his liking when he takes over as president in January. He'll also have a chance to pick a new chairman and vice chairman in 2018, when Yellen's term and that of her deputy, Stanley Fischer, expire.