Treasury Secretary Calls for Simpler Fed Framework Amid Liquidity Strains

U.S. Treasury Secretary Scott Bessent said the Federal Reserve’s current method for steering short-term interest rates is under pressure and should be made less complex. Speaking in a televised interview on Tuesday, November 25, 2025, Bessent argued that the central bank’s “ample-reserves” approach is showing signs of stress and may no longer provide the stability policymakers expected.

The Fed adopted the ample-reserves regime after the 2007-2009 financial crisis, shifting away from its pre-crisis practice of tightly managing the quantity of reserves in the banking system. Under the newer framework, the central bank influences market rates primarily through administered tools such as the interest it pays on reserve balances, its Standing Repo Facility (SRF) and the overnight reverse repurchase agreement (ON RRP) facility. These mechanisms are intended to keep the effective federal funds rate within the target range set by the Federal Open Market Committee (FOMC).

Bessent said the system “has become very complicated” and cautioned that reserves may not be as plentiful as the Fed assumes. He did not specify what evidence led him to that conclusion, but his remarks followed a series of market events that have drawn attention to the central bank’s balance-sheet strategy.

Liquidity pressures before the October meeting

In the weeks preceding the FOMC meeting in late October, liquidity in key short-term funding markets tightened noticeably. That strain drove qualifying counterparties to tap the SRF for sizable amounts of cash, while separate bouts of inflows into the ON RRP facility underscored uneven distribution of reserves across the banking system.

Against that backdrop, Fed officials decided at the October gathering to halt the reduction of the central bank’s $6.56 trillion balance sheet as of early December. The decision paused a process that had been shrinking the holdings of Treasury and mortgage-backed securities, an effort aimed at gradually normalizing the post-pandemic expansion of Fed assets.

Ongoing debate over the Fed’s footprint

Bessent has repeatedly questioned whether the Fed’s large portfolio distorts pricing in financial markets. Critics argue that by owning trillions in longer-dated securities, the central bank affects the slope of the yield curve and complicates the separation of monetary and fiscal responsibilities.

Similar concerns have been voiced within the Federal Reserve System. In a speech on November 14, Kansas City Fed President Jeffrey Schmid said a large balance sheet can blur the boundary between policy spheres and influence duration premiums. Schmid also pointed to the “meaningful” interest payments the Fed now makes to financial institutions as it manages liquidity through administered rates.

The cost of maintaining the current framework has become more visible as market rates have risen. According to the Fed’s own financial statements, the central bank has accumulated a shortfall of approximately $240 billion because the interest it pays on reserves and other liabilities exceeds the income from its securities portfolio. While those accounting losses do not affect its ability to conduct policy, they contrast with the consistent remittances to the Treasury recorded in earlier years.

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Balancing act for policymakers

The Treasury secretary’s comments add to the wider debate over how the Fed should calibrate its operating regime. Supporters of ample reserves say it provides a predictable channel for transmitting policy decisions and reduces the risk of disruptive swings in money-market rates. Detractors counter that the framework depends heavily on large-scale asset holdings and frequent use of standing facilities, features they believe increase complexity and market dependence on the central bank.

For now, the Fed has not signaled plans to abandon the ample-reserves approach. The FOMC continues to set a target range for the federal funds rate, currently enforced by the rate paid on bank reserves and the ON RRP offering to eligible counterparties. The committee has also indicated that balance-sheet runoff could resume if funding conditions stabilize. Minutes of the October meeting noted, however, that several participants were concerned about maintaining “smooth and effective” control of money-market rates while reserves remain unevenly distributed.

Bessent did not outline specific steps he believes the Fed should take, but his call for simplification suggests support for a leaner system that relies less on large-scale asset holdings and multiple standing facilities. Any significant redesign would likely require extensive analysis and consultation among policymakers, market participants and legislative stakeholders.

Additional details about the Fed’s operating framework are available on the central bank’s official website, which provides explanations of its balance-sheet tools and liabilities.

Crédito da imagem: Reuters