Federal Reserve's Logan: The balance sheet can be reduced by changing regulatory rules

Golden Finance reports that on April 2, Dallas Fed President Logan outlined on Thursday the path and options for the Federal Reserve to reduce the size of its balance sheet, while also noting that the current system is operating well and that it benefits overall financial stability. Logan said the Federal Reserve’s current framework for managing financial liquidity is designed to provide a “ample” level of reserves, and that the system is “efficient and effective.” However, under the existing framework there are still multiple ways to help reduce the Federal Reserve’s holdings, and many of these measures involve rules governing how financial institutions manage their cash reserves. Recent research from within and outside the Federal Reserve has indicated that, through regulatory adjustments that prompt banks to hold lower reserve levels, the Federal Reserve could further shrink its balance sheet under the current system. Logan said she agrees, saying the Federal Reserve is currently working to make reserve management “more efficient” during periods of stress. She also said that some liquidity rules, while they increase reserves, do not increase safety, because banks are unwilling to use these reserves during a crisis. “This is the inefficient use of the Federal Reserve’s balance sheet, and we can completely avoid this situation.”