Federal Reserve Logan: The balance sheet can be further reduced by adjusting regulatory requirements

Gate News message, April 2, Dallas Fed President Logan outlined on Thursday the path and options for shrinking the Federal Reserve’s balance sheet. Logan said the Fed’s current framework for managing financial liquidity is designed to provide a “ample” level of reserves, and that framework is “efficient and effective,” bringing benefits to overall financial stability. She noted that under the existing framework there are still multiple ways to help reduce the Fed’s holdings, and that many of the measures involve rules governing how financial institutions manage their cash reserves. Logan said recent research inside and outside the Fed indicates that, by encouraging banks to hold lower reserve levels through regulatory adjustments, the Fed could further shrink its balance sheet under the current framework. She agreed with this view, saying that the Fed is currently working to make reserve management “more efficient” during periods of stress. Logan also criticized that some liquidity rules increase reserves but do not improve safety because banks are unwilling to use these reserves during a crisis—“this is an inefficient use of the Fed’s balance sheet, and we can absolutely avoid this situation.”