Federal Reserve's Logan: Balance Sheet Reduction Possible Through Regulatory Changes

Odaily News: Dallas Fed President Lorie Logan outlined the path and options for the Federal Reserve to reduce the size of its balance sheet on Thursday, while noting that the current system is functioning well and benefits overall financial stability. Logan stated that the Fed's current system for managing financial liquidity is designed to provide an "ample" level of reserves, which is "efficient and effective." However, there are still multiple ways within the current system to help reduce the Fed's holdings, many of which involve rules governing how financial institutions manage their cash reserves. Recent research, both internal and external to the Fed, suggests that by adjusting regulations to encourage banks to hold lower reserve levels, the Fed could further shrink its balance sheet under the current framework. Logan expressed agreement, stating that the Fed is currently working to make reserve management "more efficient" during periods of stress. She also noted that some liquidity rules, while increasing reserves, do not enhance safety because banks are reluctant 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." (Jin10)