WSJ's Take On the Week Why the Fed’s Balance Sheet Matters as Much as Its Interest-Rate Decision
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Dec 7, 2025 Nate Werfel, head of market structure at BNY and former New York Fed official, dives into the complexities of the Federal Reserve's balance sheet. He highlights how liquidity in the financial system affects everyday consumers, especially during mortgage financing. By recalling the 2019 repo spike, Nate discusses the risks of scarce reserves and their impact on funding costs. He also emphasizes the crucial role of a liquid Treasury market in preventing crises like the Silicon Valley Bank failure, linking balance-sheet choices to interest-rate policies.
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Balance Sheet Decisions Matter As Much As Rates
- The Fed's balance-sheet choice matters as much as its rate decision for market liquidity.
- Changes in reserves affect overnight funding costs and can ripple into asset prices and borrowing rates.
Ample Reserves Prevent Market Disruption
- The Fed must ensure reserves remain 'ample' to prevent erratic spikes in overnight borrowing costs.
- Scarcity of reserves can push overnight rates far above the Fed's target and disrupt markets.
The 2019 Repo Spike That Shocked Markets
- Nate recalls the September 2019 repo spike when overnight funding reached 9–10% despite target rates near 2.25%.
- That episode taught central bankers the danger of tightening without clear liquidity buffers.