Mnuchin reportedly asked around to see if there are alternatives to Fed rate hikes

  • Treasury Secretary Steven Mnuchin approached several bond market pros to ask them if a Fed acceleration of the pace of its balance sheet reduction could take the place of interest rate hikes as a policy-tightening measure.
  • The fixed income group was split on the idea, as Fed officials remain pleased with the progress of the balance sheet program so far.
  • President Trump has skewered the Fed and Chairman Jerome Powell for the rate hikes.

With the Federal Reserve under fire for raising interest rates, Treasury Secretary Steven Mnuchin has been looking to see if there are other ways to normalize monetary policy, according to a report.

Mnuchin has been asking some of the biggest players in the bond market if they would rather see the Fed step up the rundown of its balance sheet than hike short-term rates, according to a Bloomberg post that cited six people familiar with the discussions.

The balance sheet consists mostly of bonds the central bank purchased in its efforts to stimulate the economy during and after the financial crisis. It currently totals $4.15 trillion, down from $4.51 trillion where it stood before it started allowing a capped level of proceeds from the bond holdings to run off each month.

Mnuchin reportedly approached the fixed income dealers on the and investors to ask them if a Fed acceleration of the pace of the balance sheet runoff could accomplish its goal of tightening policy to prevent the economy from overheating. The runoff pace is currently at $50 billion a month.

The report said that the people to whom Mnuchin spoke — members of the Treasury Borrowing Advisory Committee that makes recommendations on the pace of government debt sales — were split on the idea.

A Treasury spokesman said the TBAC regularly provides Treasury secretaries the opportunity to meet and discuss "debt management issues."

Fed Chairman Jerome Powell and other policymakers have said frequently that they consider the fed funds rate, which determines the overnight rate that banks charge each other for short-term loans, is still the best tool for setting monetary policy. The rate is currently targeted in a range of 2 percent to 2.25 percent and is used as a benchmark for most forms of consumer debt.

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Officials also have said repeatedly they believe the balance sheet reduction program has gone smoothly so far.

A source familiar with the interaction between Treasury and TBAC said a similar inquiry about using the balance sheet occurred during the quarterly refunding process in October.

President Donald Trump has been vocal in his criticism of the rate hikes, most recently telling The Washington Post that he is "not even a little bit happy" with his choice of Powell to lead the Fed.

Powell is set to deliver an important policy speech Wednesday afternoon at the Economic Club of New York. The Fed is widely expected to approve another quarter-point hike at its December meeting but is at odds with market expectations for what happens in 2019.

The full Bloomberg report is here.