Allies of President-Elect Donald Trump are calling for the Federal Reserve to sharply shrink its $4.5 trillion balance sheet, which the central bank built up as a cushion from financial shocks. They claim that the Fed has hurt economic growth by prioritizing the funding needs of government and large corporations to the detriment of fast-growing small businesses and individual savers, including retirees who rely heavily on investment income, according to Bloomberg. (See: America’s Startups Crisis: It’s Hurting the Economy.)

Hindering the Recovery

By aggressively purchasing bonds on the open market, the Fed created liquidity to bolster the economy and the securities markets as the nation struggled to recover from the 2008 financial crisis. But that strategy also has bid up bond prices and lowered yields. This has been a boon to large issuers of debt, most notably the federal government and large corporations.

On the other side of the ledger, small savers have been paying for this policy with returns on bank deposits and money market funds of close to zero percent. Small businesses also are hurt, given that the flattening of the yield curve has discouraged banks from lending. That is, the spread between what they pay to raise short-term funds and what they charge on long-term loans has shrunk, reducing incentives to lend.

Bond prices have fallen and bond yields have gone up after Trump’s election as investors anticipate higher economic growth and inflation, given his promises to lower taxes and increase spending on infrastructure and the military.

Calls for Downsizing

Senior Trump economic advisor David Malpass told Bloomberg that bond purchases by The Fed “have been very harmful,” and that the central bank must “communicate a plan for downsizing its balance sheet.”

House Financial Services Committee Chairman Jeb Hensarling (R-Texas), a longtime critic of the Fed, has been sympathetic to that view.  In a June 22 hearing, Hensarling accused The Fed of “picking winners and losers in the credit markets.” Hensarling worked closely with Vice President-Elect Mike Pence when Pence served in Congress.

For his part, Trump warns that the Fed’s low interest rate policy has created a dangerous stock market bubble, which often is a prelude to a crash. Investors in search of higher returns have poured funds into equities, bidding up their prices significantly.

Fast Sales Too Risky

Fed Chairman Janet Yellen counters that lower interest rates benefit individuals and small businesses who borrow, such as for home purchases and business expansion.

Peter Fisher, a lecturer at Dartmouth College who previously served at the New York Fed and later in the U.S. Treasury Department under President George W. Bush, is critical of the central bank's policy. However, he advocates a gradual shrinkage of its balance sheet by not reinvesting the proceeds of maturing bonds. He believes that outright sales of bonds would be too hasty right now, given that the yield curve already has started to steepen after the election.

Fed Resistance

Trump may not see changes anytime soon. Even though Trump can select two new Fed presidents next year, Yellen isn't set to step down until her term expires in 2018. That means a majority Fed policy makers is likely to support maintaining the central bank's large balance sheet, at least for the moment.