Like to get started with JPMorganChase. As you folks know, JPMorgan is our largest bank here in the U.S., with over $5 trillion in assets. We are very pleased today to have Charles Bristow. He is the Head of Treasury and Chief Investment Officer at JPMorgan. He joined JPMorgan back in 1998, and in 2014, 2015, he became the Global Co-Head of the head of rates trading in the EMEA region, and has steadily moved up through that time period, of course. Charles, thank you very much for joining us.
Pleasure to be here.
What we would like to start off with is rate expectations. JPMorgan has been known to have a differentiated view on the trajectory of interest rates over the years, and the market currently is expecting three additional hikes through the end of 2027. Do you think the market has it right, or what is your guys'-
I was just wondering if your notes there were live. Because when you first drafted it, they might have been different. The market probably does not actually have it right, but the market, it is always worth remembering, the market is probability weighted. It could be five and it could be none kind of thing. We have ticked down a long way for We have come back a long way for how many hikes are priced into the end of 2027, and it is just over two now, as you say. That is getting, I think, to the lower end of the range of what is credible. I think probabilistically, the market is not a million miles off, but if I think about where are the tail risks right now, we would still be a little bit cautious on to the upside.
For what it's worth, for us, I don't think what the policy outcomes in 2027 matter very much at all. I think what really matters for us in terms of running the portfolio is, what over time is the market going to settle on as being the inflation propensity of the economy, and therefore what kind of neutral rate is the Fed going to need to set? That's been the sort of medium-term reckoning that's been going on, right? If you think four years ago, you had medium-term rate forwards getting back to 3%, now they're at 5%. That's been the real paradigm shift, is this realization that we're in a high growth, high investment, high inflation propensity, much, much higher neutral rate environment. I think the Fed is acknowledging that, but that's led to this sort of curve steepening, much, much higher medium-term rates environment.
I think, for some people, that kind of leads to challenges in investment portfolios. I think if you're a bank, that's the bit that really matters.
Right. Yeah.
If you're invested for 2027, by definition, by the end of 2027, those investments have rolled off. If you are invested in 10 years, you better be at the right neutral rate.
Yeah. If we talk about duration, has the Fed's shift from holding rates flat to rising rates changed how you plan to manage your balance sheet from a duration profile of the firm?
Not structurally. Our approach to managing the balance sheet has always been much more about being prepared to navigate the two ends of the spectrum and being strong in both ends of the spectrum. The reason for a bank portfolio to carry length in its duration, and this is a bit of a banking 101, so it is the wrong room for it, but is, we get by length, by having duration length, we get earnings stability. That is a tick. But we have portfolio losses risk. That is a minus, right? You have got to look at what does the balance sheet look like if your portfolio is stressed versus what kind of earnings volatility are you willing? It is very much about stress testing the outcomes. Obviously, Fed raising rates was always an outcome we were prepared for, so it does not fundamentally change anything.
I think if you look at things like reported EAR, you could see in Q3, our EAR ticks down, but that is really because of deposit convexity. We are just recognizing that there is a higher pass-through. No, being structurally balanced to be strong at both ends of the spectrum is the thing. I think the other point is we have tended to avoid longer-dated investments for a long period of time. With a view that the market just was not correctly pricing us moving back into this more like late 1980s, 1990s paradigm of big infrastructure investments, both by government and private sector. That thesis has been our differentiator, and that is really been the main driver, I guess, of why the portfolio has remained strong and the balance sheets remain strong even in this move to higher rates.
All I would say on that is, at current pricing, it is a little harder to maintain that stance than it was four years ago. I think you sort of start to look at it and go, "The market is more fairly priced.
Yep. Many of us in this room think about AOCI and held-to-maturity portfolio. Has the rise in rates changed how you view HTM securities, and does the HTM hedging proposal that is out there with FASB, does that change how you may manage that securities portfolio?
Directionally, for sure.
Okay.
I think it's great that FASB. FASB, by the way, did an excellent job of engaging with the street, like really talking to people who are deep in the weeds of thinking about bank investment portfolios. They had them all up to, where are they, Connecticut or somewhere? Sorry, that was a very British thing to say, wasn't it? Connecticut? But they really engaged with, like, what is the thing that drives it? I will give you a little bit of a kind of how do we think about HTM. There is two things that are quirky about HTM, and obviously our CEO loves to talk about HTM. One thing about HTM is, it is hugely more capital efficient than AFS.
And as such, there is a small risk that for kind of more credit-sensitive instruments, you could be incented to own things that you might not otherwise own because of the capital benefit, and own them in a way that is very, very structurally illiquid. Like, you cannot sell them and, you know. And that can just lead people to maybe make poor balance sheet decisions motivated purely by accounting treatment. That, I think, is a point that is totally aside. But the other thing about HTM, when you could not hedge it, you had to think about how much duration you were willing to hold in HTM through the lens of, you know, I said before, you want a firm like JPMorgan to be strong at both ends of the rate range.
In a high- rate environment, we will need less fixed rate assets. We need to stress test ourselves to say, in a high- rate environment, we can unwind all our swaps, we can sell all our AFS, but we're still left with the duration that's in HTM, right? That really, in stress testing ourselves, that puts an upper bound on your HTM duration. If you can hedge it doesn't, right?
Right.
It immediately kind of frees up that constraint about managing through the cycle, without having to kind of take the unnecessary volatility in the AOCI capital, which obviously is actually a regulatory input. Otherwise, you're carrying CET1 just as a buffer for rate volatility, which is pretty inefficient use of CET1. Directionally and on the margin, yeah, it definitely allows us to take a little more low credit rate instrument risk in HTM. It's certainly a positive direction of travel.
Got it. Moving over to the deposits, this rate hiking cycle started at an elevated level of rates compared to what we saw in 2022, of course. How are you guys thinking about deposit betas in this rate cycle relative to what you all saw in 2022, 2023?
Interestingly enough, we went into the 2022, 2023 cycle still with a lot of fairly new and unseasoned deposits. I think going into 2022, 2023, you had two effects going on, both of which were going to be very rate sensitive to either balances or rate paid. And I think it's very important to say that balances and rate paid is an interchangeable concept, right?
Right.
The average depositor hadn't yet sort of, if you like, kind of woken up. There had been low rates for so long. Right? So, 2022, 2023, from a rate-setting perspective, I guess, was a bit of an awakening. There was some money in motion, but plus there was very unseasoned money that hadn't found its natural home. And so, a s a bank, our deposit strategy is to hold really, really operating deposits, right? Low beta deposits that are adjacent to high value-add activity, whether that's payments flows or balances in our custodian, or checking in our retail. That is our core strategy, with CDs being the, make sure that we give people a sort of top of the market rate for when they want to do something different. So, obviously in 2022, 2023, that was always going to be mainly manifested through the normalization of balances, and it was.
By definition, going into this rate cycle, neither of those conditions actually is still there. We've gone through this sort of normalized rate level for quite a period of time, and rate-seeking behavior has had a long, long period to play through. That's what we see. I think what's interesting is if you look at our deposit balances now, it's almost turned into a perfectly straight K curve, right, which is just growing with payment volumes and security services balances and all those kind of things, which is very comforting. I think we feel that our deposit balance has reverted to something. It's behaving like you would expect for a bank that's very, very concentrated into operating deposits. I don't massively expect that to change. The only difference will be if we sort of break the range.
If we go into a different paradigm, then I think we have to be very thoughtful. We are doing, as you'd expect us to do, plenty of stress testing of what kind of things would happen if we break the range and we push back to more unprecedented levels of policy rates.
Got it.
That's more like preparing for the worst rather than expecting the worst.
Yes. No, no, understood. Regulators are finalizing and working on a number of change to bank regulations that we're aware of course. Before getting into specifics, can you talk about why the reforms are needed?
Yeah. I mean, which one should we start with?
I don't know.
Do you have any preference?
You can choose. Stress test, Basel III, whatever you'd like.
God, there's a lot. Look, stress testing.
Yes.
The main thing to say about stress testing is it was a very opaque process. That happened once a year with a very short implementation period. With models that really didn't track. So, there's a big organizational burden to implementing it inside the bank, where you sort of run it for yourself, you invest a huge I mean, that sits in my team. Costs us a huge amount of money to run that thing. We run it, and we do our own PPNR models and all that kind of thing. We've got a really good sense of what would happen to the institution if you go through the scenario that they kind of give you. Then you get back a number that says, "Oh, we don't agree, but we're not telling you why." So, the opacity sort of led to a place like, "Why are we spending all this money?
Like, what is this for?" It's once a year, and then you're told, well, three months later, you've got to be compliant as well. So, we've got capital volatility, you've got lack of governmental accountability, or had. You've got short implementation period. I think what's been With stress testing, really, though I still think there is a sort of slightly flawed concept of taking these, let's just keep re-preparing ourself for a crisis that looks a bit like 2008. I mean, we've all been around long enough to know that the same crisis never strikes twice, so-
Correct. Correct.
The next crisis will be the thing that you are not prepared for, not the thing you are prepared for, by definition. Though it is a little flawed, we are really, really, really pleased about the increased transparency. Averaging is good. [GMS] moving to the average two scenarios is a good scenario because it kind of takes out the gaming. All of that is really positive. The PPNR models, they seem to have really invested in. They clearly rushed it through a little bit. There is a little bit of cleanup. I think we are expecting in the next few months, some NPRs on some tiny refinements. It is a good direction of travel, and if we are going to do it, at least it is-
Right
It is reasonable. I think, the Fed released what they see as the impacts for the system. I think they said about 20 basis points. It is not like it is a game changer, right? It is not like they have massively loosened standards, but they are making it more user-friendly and more predictable and less volatile.
Yeah. Do you think, will it change the way you guys manage the firm, or do you think it will have any impact on capital requirements? Stress test, that is.
No. I mean, look, the short implementation period and the capital volatility ultimately turns into a buffer.
Yeah.
And it turns into a buffer that is not deployed in the economy. Yeah. I mean, these sorts of making anything more predictable and less volatile ultimately gives us more usable capital.
Right. Right. Good point.
We shouldn't talk about excess capital now, ironically. But anyway, through the cycle, let's say. But I think in time, we're diversified enough not to do things that we fundamentally don't disagree with because of a bad rule.
Right. Right. Moving over to the other changes, Basel III and the GSIB final rules. JPMorgan's been a prominent voice in saying the Fed didn't go far enough in the new proposal. What do you believe needs to change in the final rule, and how do you think about the odds of the proposed changes actually being reflected in the final rule?
Yeah. I mean, I think, again, it's a good direction of travel. I almost don't want to say it's great that they got round to recalibrating the coefficients, given that that was committed to over a decade ago. That doesn't feel like a give-me. That kind of just feels a little bit of an overdue repayment. It's a good direction of travel. I think, again, let's talk about capital volatility is an undesirable feature in an economy. Right? That makes banking capital be inefficient. GSIB being measured once a year with large kind of cliff edge step functions. The sort of 50 basis points buckets created a lot of inefficiency in the deployment of capital into the economy. You saw crazy one-day moves in things like FX forward rates and funding rates and so on. That was just undesirable and unnecessary. Big pluses, smoothing, smaller buckets, big pluses.
Some recalibration, half a plus, in that it was done, but it is still a little I still have to question why not actually fully do the sort of recalibration back to the inception day? We got to remember, U.S. Method two is already a heavily gold-plated version of Method 1.
Yes. Correct.
So, to have gold-plated it and then allow the gold plating to be progressive and given an opportunity to recalibrate, to not actually take it back to the original intended level of gold plating, I guess, that hasn't been delivered on quite enough. And then it does feel like the kind of quirky change to short-term wholesale funding, just feels a little bit like a plug. Like a solve for. If we had two big asks, and you asked me what I think the probability is, and it's not 100%. But the two big asks would really be, do the recalibration of the coefficient properly. And don't make an arbitrary change to short-term wholesale funding, at least without explaining the policy, the sort of policy ambition for doing it. To belabor the point on that a fraction, short-term wholesale funding only exists in the U.S. rules.
The concept of it was to say, if your balance sheet is reliant on rolling funding again, rolling short-term funding to fund some assets, just recognize that if the system gums up, you might need to actually sell the asset. So, just hold a bit of capital. It's very equivalent to things like minimum repo haircuts, right? It's to say, you might need to sell the asset, and you probably won't sell it at par. That's fine. But that is a concept which applies equally to all banks, right? The bid side for an asset is the same bid side for every single institution. When the Fed decided to add short-term wholesale funding as a capitalization requirement in the first Method 2, they recognized that, they specifically put RWA in the denominator.
So that it would be the same capital deduction for every institution. They wrote a paper on it to explain why they wanted to do that. They haven't explained why they want to reverse it, but they did explain why they wanted to do it. I just think that that's not good process. If you want to reverse it, say why you were wrong, not use it as a plug. Because the only real policy ambition that you can have for saying you want the only way you can interpret the current policy ambition is to say, we want people with a broadly diversified set of liquidity sources to hold more capital against one of those sources, and we want people who are more narrowly funded against a less diversified set of liquidity sources to hold less capital.
That can't be the policy ambition. Anyway, sorry, long answer, but it's a frustrating one because it sometimes feels like we're getting given a bit of a plug.
Yep. If the final GSIB proposal is what it is today, does that hurt your ability to compete? How about the low ROA areas such as certain activities in markets? Can they clear a return hurdle if a GSIB surcharge is 5% or more?
I think we would. The answer, the technical answer is that with some of the current proposed rules, and by the way, like NIM cap is another one as well, the sort of operational risk NIM thing is another one. Some of these proposed rulemakings add an extreme capital burden to very, very low-risk intermediation business to the point that, no, it becomes not really credible for that business to hit a hurdle. On the margin, it takes away our ability to provide one of the functions that we should for the U.S. financial system. That is the sort of technical answer. Then there is the practical company answer. If you are a JPMorgan client across multiple lines of business, we are not going to pick and choose which business we do with you, right?
We are going to do the good stuff and the bad stuff, and we are going to look at you holistically as a client. No, it is not going to cause us to make. For holistic clients of the company, no, we are going to treat them like good clients, and we are going to service them properly in all areas. But on the margin, does it mean that companies that really should be doing the low-cost intermediation business on the margin pull back from it, just invest it a little bit more? Yes, bad policymaking would do that, yeah.
Got it. Capital return has always been a part of the investment thesis for the banks, particularly JPMorgan, and many of the folks in this room, as well as other investors, were surprised by the drop in the share repurchases in the third quarter. Can you go into some detail on how JPMorgan approaches capital management with the future trajectory of capital levels, and why was there a sudden change in the pace of repurchases?
I feel like if Jamie was at the back of the room, he would say, "I will take this one." Poor Jeremy. I cannot remember how many. I mean, I have been at JPMorgan, as you said in the intro, 28 years, and I cannot remember how many times I have heard the speech about the hierarchy of capital, returns and distribution and so on. I will just repeat it. The only thing we are ever really committed to is the dividend through the cycle, sustainable. After that, we have to look at, what do we think over the medium term is the best use of our capital? Therefore, if we believe that there will be better uses for our capital in the near-ish future than just buying back stock today, then we retain.
But I also think it's very worth noting that we are already finding so much demand for our capital that if you look at, say, like our RWA growth CAGR. It isn't running at 3%, 4%. It's running at, give or take, double- digits. That requires us not to distribute 100%, right? I mean, people sort of ask, "What use will you have for that capital, and do you think you can find organic uses?" Today, we have been finding organic uses. Some of our peers have had capital ratio drops in three- digits. I mean, our capital ratio drop has even. In a curious way, I think when your capital ratio is dropping, people querying why you slow buybacks is probably the wrong question. It's like, it should be a great thing that we're finding organic use for the capital.
And the other thing I'd say is, you'll all have a model, and you're better at this than I am because I'm a fixed income guy. But our cost of capital is low relative to the places where we're finding organic deployment opportunities. So I think you've got to look at it through the lens of two things. One, we're already seeing huge amount of growth in capital markets. We're participating in that, and we're finding organic deployment. The world is desperately short capital, and building, if you like, a war chest of capital at a low cost of capital rate, ready to sort of lean into opportunities that arise, just seems prudent.
Yep, got it. Before we open up the floor for some questions, another question on SLR, the supplementary leverage ratio reform. It has been in place about a year.
Yeah.
What are your thoughts, and has it or has it not achieved what it was expected to achieve?
When they did that, and obviously, my team was, and I, among all the other sort of GSIBs and so on, were consulted. I very much had that as, this is a very good rule change. It will not matter until the next time it matters. But it's a good piece of housekeeping. The wind was behind our back for regulatory cleanups, and it seemed like you should take the advantage. We had to do some crazy things in 2021 in terms of raising long-term debt because we saw deposit inflows. I mean, how silly is that? It was probably good. There's not that many fixed income buyers here. I know that's funny. When I do the round tables for our fixed income debt buyers, they thought that was awesome. That's a silly thing really. It's like you get in one liability and you have to issue another one.
That makes no sense. SLR in recent history, because it was over-calibrated and it didn't have the right sort of release valves in it, created bad behavior. It created imperfect behavior. Cleaning it up was always going to be a good thing to do. I didn't really think it actually would be kind of necessary in the near years. In practice, in the last 18 months with this huge infrastructure build-out that we're seeing, I don't think it would have been possible. I don't think this economic period of time would have been possible without that SLR rule change. I mean, there are institutions today who are big participants in that intermediation, who really couldn't operate at the current level of balance sheet leverage without that rule change. So, yeah, actually it was far more timely than we might have realized.
I think because of it, curiously enough, because of it, the U.S. has been able to lead the world in participating in the build-out of some of this sort of infrastructure that is I don't know. Actually, I don't want to take a view on whether it's a good thing or a bad thing. The U.S. has been able to participate in this particular new economy build-out in a way that really we'd never have otherwise been able to do, I think.
That's very interesting. Let's see if there's some. Okay, hold on, Mike. The microphone's coming up from Johnny.
Thank you. Mike Mayo, Wells Fargo. When you go to sleep at night, and you dream about interest rates, what's a really good dream and what's a bad dream, and where are we today in that continuum?
Mike, are you asking me my risk? I used to trade the rates options book in the CIB, and that was the last time I actually had nightmares about interest rates. The mark-to-market is a far crueler being. What really worries me, look, I don't want to be too unscripted with this, but we stress test ourselves to both ends, as I said. I feel prepared for both ends. There's not like a nightmare scenario. What actually worries me is more about a rate of change to higher rates. I'm not so concerned about it for JPMorgan because we've stress tested ourselves against getting there, but I do think if you see a rapid repricing to higher rates, you do risk kind of re-entering this place where people's balance sheets won't have the ability to kind of reprice. You won't have the sort of pull-to-par effect.
There will be a big confidence impact, and some of the sort of liability chasing that will go on could sort of become a bit self-fueling. At a system level, the sort of breakaway rapid move to higher rates is the thing that concerns me much more. I think if we see a generic slowdown, we're well protected on income for that policy period. I think it'll be problematic for the medium-term sovereign debt ratios and so on. I think that that will be a relatively stable outcome. If the move to higher rates needs to be too fast, it will have very non-linear and unpredictable outcomes.
Your fear is the second half of 1994 again?
Yeah.
Any change in view due to the election? You say, "Hey, we want to be more prepared for maybe a lower yield environment," or anything like that?
No, I mean, I don't see anything in the election that has. The rates move on it has been pretty muted. I don't see any reason why the election massively changes your prognosis for short-term rates. I mean, if anything, we're going to enter into a phase where two parties are going to need to find a place to work together. I think the only thing that they agree on is that there are certain things we need to spend on. They disagree on the things you need to spend on, but they could probably agree that the main thing they might agree on is you spend on both. I don't think the nature of partnership is going to look like austerity. It's probably going to look like expansion.
In the short- term, I think the dynamics driving inflation are very little now to do. Well, have very little to do with that sort of immediate politics. We're far more in an environment, in my opinion, where we've got relatively interest rate insensitive aspects of the economy growing fast, but where the investments that are being made are viewed as an imperative and therefore will keep being made. I think that dynamic is politically insensitive.
Up front here. Scott.
Hi. Scott Siefers, TD Cowen. Can you just talk a little about how you think about things like deposit velocity potential over, say, the next several years versus the last several? I guess on the one hand, you appropriately noted, customers have had plenty of rate-seeking opportunities the last several years, so we sort of know what things look like. On the other hand, you have sort of a potentially new paradigm with things like agentic AI and how easy it could be to move money. I guess I'm just curious, even though I don't think anybody thinks there's any risk to a JPMorgan, but you all are so well known for preparing for things that are unlikely to happen. So I just am curious to hear how you think about things like that internally.
I mean, I think it is a very important question that big banks have to grapple with. I think implicit in your question, though, you said something that was spot on, which is, in the coming years as opposed to now. I think we can acknowledge we are sort of going into a period of market structure, potential market structure change, and that that is going to be more like sort of Moore's Law, sort of progressive, but getting to a place where you might not, in 10 years' time, recognize where you came from. So I think it is more of a like, we need to track it, and it needs to feed into the investment thesis.
I guess I could say something really kind of silly, like we would hope that if a super intelligent agent had to recommend the best bank account in the world, then hopefully that could be good for us. But that would sound actually far too glib. I guess you have to remember, what are the motivations for people in their banking, right? I mean, there is definitely a convenience function of having a number of days of cash ready to cover all your payments and some unforeseens. So there is this I do not think what we are looking at is fundamentally changing the business model of checking. We are not hugely in the business model of high yield. So, yes, on the margin, there is probably a sliver where people could be more optimized.
Generally, our customers, I mean, if you think about it, if you are a Chase customer, if you want a high-yielding product, you can go into the app and you can press one button. That is objectively still simpler than an agent, right? But I am not understating it, but I just think the sort of agents becoming embedded in people's lives is likely to be slow and progressive. The second thing is, I think we are going to keep being bombarded with headlines about sort of AI risks, AI misbehavior, and so on. The growth of confidence in how agents behave when they act as your persona is going to be a bumpy road, right? I mean, it feels like there is more bad headlines today than good headlines about stuff that agents do.
Obviously, as a company, one of the things we are going to really need to make sure that we do is, if you like, protect our customers for the actions of agents when they act inside our perimeter. That is part of our sort of system. Anyway, it is an imperfect answer. I think that it is going to be very incumbent on us to understand what structural changes that can happen in the economy over time, and to the extent that it creates incremental deposit velocity, what that means structurally for the economy. On that last point, without making this specific about JPMorganChase, the more velocity there is in deposits and the higher beta deposits have, then the less demand banks have for duration-bearing assets and credit, and credit raising availability.
I also would say that people need to be quite mindful about the second-order effects of this in fixed income. Not that we're going to get there, but in extremis, high-velocity deposits at 100 beta mean that banks leave all their money in cash. That really kind of changes the question of where is leverage created in the economy. Yeah, we'll see. But again, when you think about our kind of core investment thesis of wanting to keep our long-dated balance sheet quite clean, it's probably on the margin only another reason to double down on that.
Before we're running out of time, I do want to get to some liquidity questions. You mentioned a moment ago about the SLR being very successful maybe in allowing the country to grow the way it has in terms of the financing. JPMorgan has said in the past, liquidity is starting to become more of a constraint. What's the current state of liquidity in the banking system, and are you seeing any signs that liquidity is curtailing activity or causing stress in the markets?
I'm not seeing any signs of stress, but certainly you can see very clear evidence at the level of the system, liquidity is a binding constraint. If you, say, download the U.S. kind of time series of H.8 data, which is a fun thing to do, it's like the sort of million miles high view of the economy, you see this inflection point around 12, 15 months ago where you've got this period post-2022 where banks are all sitting on massive amounts of excess cash, huge amount of lending capacity, and lending resumes. Lending really is sort of like a drawdown to cash. Then you kind of hit this point where the vast majority of lending starts to be funded by bank borrowing. They take off, right? You can really see now a very strong relationship between marginal lending and bank borrowing.
I mean, that is the fingerprint that liquidity is a binding constraint for the banking system. So what does that mean? It means you've got sort of banks. The cost of funding to people that borrow from banks kind of needs to be a spread on top of banks' debt curve, not banks' deposit costs. I think maybe you kind of see that in the borrowing costs, right, of the hyperscalers and the like. So it is a constraint, and yet paradoxically, institutions like ours have. I mean, we have about $1.3 trillion of actual liquid assets. Now, of course, that directly feeds our outflows. But we also have almost. We also have a huge amount of things like discount window capacity that we give zero value to.
I am not actually a proponent for giving it full value because everyone needs a bit of contingency. But there is a very arbitrary distinction between the two, right? There are high-quality assets with no liquidity value. Then there is the thing just the other side of the line, which is like 100%. So a little bit like with GSIB, there is this arbitrary cutoff, which is unreflective of the kind of behavior that banks in practice would exhibit in a stress. That, I think, on the margin, is curtailing liquidity capacity in the system.
Yeah. Maybe as a final question, obviously, we have a new Fed Chairman, Chair Warsh.
Yeah.
He stated that over time, he wants the Federal Reserve's balance sheet to shrink from its present levels. What are the implications of a smaller Fed balance sheet in the future, and would doing this make liquidity constraints even a bigger concern?
I think that it is such a complicated question. First of all, there are two things which I think are a little conflated, which is the risk profile of the Fed's balance sheet, I think sometimes just gets paraphrased as the size of the Fed's balance sheet. I think in practice, many of the people who might be critiques of Fed policy might say it is really about the risk profile that they had an issue with. Of course, when the risk profile grew, the size grew, but that is kind of, if you like, coincident rather than causal. Second thing is, just numerically, if the Fed reduces the size of its balance sheet, then liquidity in the system reduces by a numerical amount equal to one minus the notional reduction times by one minus the outflows assumed on whatever wholesale deposit that would otherwise be.
Yes, reducing the size of the Fed's balance sheet is a reduction to liquidity in a system which is already, I think, operating at an optimized level of liquidity, i.e., the binding constraint. So they would naturally take out liquidity from the system. I think they need to work hand in glove with policymakers. If they want to pursue that policy, they need to think about it holistically with liquidity reform to ensure that at a bare minimum, they offset. Otherwise, they will start to kind of drive liquidity cliffs or higher borrowing costs.
Yes. Are there any opinions from you on his initial start as Fed Chairman? What do you think? How is he doing? I know he has not been in office too long.
I mean, there is no upside for me, like kind of particularly criticizing the Fed Chair, is there? Look, I will only say the positives.
Sure.
I love the fact that he's willing to revisit some things which have been status quo for a long time. There is no doubt that the data task force has the potential to be very interesting. We see it ourselves. We're so reliant as a financial system on data that's two, three months lagging. Whereas best in class in the private sector are looking at real-time live data. The Fed can close that gap quickly and make much better decisions. Those task forces are a good move.
Good. Well, with that, we are running out of time here. Please join me in a round of applause. Thank you, Charles.