Eliminating regulations that boost reserve holdings without making the financial system safer could help the Federal Reserve shrink its balance sheet, Lorie Logan, president and CEO of the Federal Reserve Bank of Dallas, said Thursday (April 2).
In a speech delivered at the Eleventh District Banking Conference, Logan said that as the Fed’s balance sheet has grown, there has been discussion about whether it should be shrunk and how that could be done.
“When it comes to the balance sheet, as with all of the Fed’s work, the focus needs to be on how we can best serve the public and support a strong economy and financial system,” Logan said. “We should use our balance sheet efficiently and effectively to advance those goals. Balance sheet growth isn’t bad if it serves the public, but neither should we waste balance sheet space and let it become a distraction from our mission.”
Logan said she favors an approach that reduces banks’ need for reserves. The ample reserves framework the Fed has used for nearly two decades has kept money market rates in the target range and does not penalize banks for holding U.S. dollar reserves, she said.
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“It costs the Fed little, if anything, to meet banks’ reserve demand, because the interest we earn on the assets backing reserves matches the interest we pay over time,” Logan said.
To shift the demand curve inward, the Fed could make liquidity rules more efficient by eliminating regulations that boost reserve holdings without necessarily making the financial system safer, Logan said.
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The Fed could also make its liquidity tools more accessible so that banks feel confident they can monetize assets through the Fed as needed, she added.
“I believe shifting the demand curve inward through steps like these holds substantial promise for reducing reserves while maintaining the benefits of the ample reserves framework,” Logan said.
Reuters reported Thursday that the Federal Reserve has been rebuilding liquidity since late last year.
It was reported in October that the Fed was getting close to ending the reduction of assets on its balance sheet, a quantitative tightening process that began in 2022 as the central bank sought to reverse the asset purchases it made to stimulate the economy during the pandemic.
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