Fed Governor Stephen Miran said Thursday that the central bank eventually could shrink its bloated $7 trillion balance sheet by up to $2 trillion without upsetting financial markets, Financial Times reported.
Miran said that measures such as easing liquidity regulations and destigmatizing the use of some of the central bank’s lending operations could pave the way for “$1 trillion to $2 trillion of balance sheet reduction”.
Miran said his ideas would need to be “studied and calibrated,” with the implementation process taking “several years,” according to Financial Times.
Kevin Warsh, President Donald Trump’s pick to replace Fed Chair Jerome Powell, also has called for the Fed to shrink what he believes has become an excessively large balance sheet.
A Measured Approach
Warsh supports a measured approach for reducing the size of the balance sheet without causing disturbances in financial markets, Financial Times reporte.
Treasury secretary Scott Bessent also called for a review of liquidity regulations.
The Federal Reserve’s balance sheet has expanded rapidly since the 2008 financial crisis, Financial Times said, from multiple multitrillion-dollar bond-buying sprees known as quantitative easing. It peaked at a record high of about $9 trillion during the pandemic as the Fed became the largest holder of government debt.
Financial Times noted that efforts to shrink it nearer to its pre-pandemic level ended last year, following a three-year quantitative tightening program in which maturing bonds were allowed to roll off without being replaced.
The balance sheet is now about $6.7 trillion, and Fed officials have pledged to expand it further should private lenders demand more reserves.
Miran said the Fed would need to give “market guidance on how the new mechanisms will function.”
“Once the process begins, I would counsel a slow pace of reductions to ensure the private sector can absorb all the securities shed off our own balance sheet,” he said Thursday in Miami. “I am excited that all this can happen, but, if or when it does, I expect it to proceed slowly.”
