Sumitomo Mitsui Financial Group, Inc.8316
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Sumitomo Mitsui Financial Group, Inc.Sumitomo Mitsui Financial Group, Inc.Wall Street strategists expect a group of senior academics and former policymakers assembled by Chairman Kevin Warsh to review the Federal Reserve's $6.7 trillion balance sheet will face a difficult balancing act: shrinking the central bank's holdings without destabilizing funding markets. While the group's academic heft lends credibility to the process, the lack of market experts among its members could result in solutions that are good in theory but difficult to implement, some warned. The group is led by former Fed Governor and Harvard University economics professor Jeremy Stein, former Reserve Bank of India Governor and University of Chicago Booth School of Business finance professor Raghuram Rajan, and Harvard University economics professor Karen Dynan. Analysts say they will have to confront how the central bank will respond to future crises that prompted successive rounds of asset purchases in the past, most notably in September 2019 when short-term interest rates skyrocketed, and again in March 2020 when the Treasuries market seized up. The concern is that shrinking the balance sheet too far could drain liquidity and spur volatility, undermining the Fed's ability to control its rate-setting tools and, in a worst-case scenario, force position unwinds that spill into the broader Treasury market.