White House philosophy? Federal Reserve Board member Miran: The Fed’s “$7 trillion balance sheet” can be reduced by $2 trillion without causing market turmoil.

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There is a growing voice within the Federal Reserve pushing for a significant reduction of its balance sheet, highly consistent with the stance of the White House.

On Thursday, March 26, Federal Reserve Board member Miran stated that by relaxing liquidity regulatory requirements and lowering the usage of central bank lending tools, the Fed's balance sheet could eventually shrink by $1 to $2 trillion from the current approximately $7 trillion level.

He pointed out:

Once the process starts, I recommend a slow pace of reduction to ensure the private sector can fully absorb the securities released by the Fed.

He stated:

I feel excited about all of this happening, but if it really happens, I hope it progresses slowly.

Miran added that the Fed needs to provide clear guidance to the market on "how the new mechanism will operate." He also emphasized that the relevant plans still need "in-depth research and careful calibration," and the implementation process is expected to take "years".

Previously, Fed Board member Waller stated that relaxing liquidity requirements is expected to reduce banks’ demand for reserves, but only by about $600 billion.

According to reports, Miran's estimate is based on a research result co-authored with other Fed economists, and is much larger than estimates by other central bank officials.

It is worth noting that Walsh, Trump's nominee for the next Fed Chair, also advocates for shrinking the balance sheet size, supporting a prudent approach to avoid shocking the financial markets.

U.S. Treasury Secretary Besant has previously called for a review of U.S. liquidity regulatory rules. The high degree of alignment among the three parties has significantly heightened discussions about the direction of the Fed's balance sheet policy.

Historical Expansion of the Balance Sheet

The Fed’s balance sheet has undergone several rounds of large-scale expansion since the 2008 financial crisis. At that time, the Fed initiated multiple rounds of quantitative easing, injecting liquidity into the market through large-scale bond purchases.

After the COVID-19 outbreak, the balance sheet surged to a historical peak of about $9 trillion, with the Fed briefly becoming the largest holder of U.S. Treasury bonds.

(The Fed’s balance sheet once soared to the historic peak of $9 trillion)

Subsequently, the Fed launched a three-year quantitative tightening plan, allowing matured bonds to roll off without reinvestment, attempting to compress the balance sheet back to the pre-pandemic level.

However, this process was halted last year. At the time, short-term financing markets experienced volatility, and some banks’ funding costs significantly exceeded the Fed's target range, forcing the Fed to hit the brakes. The current size of the balance sheet is about $6.7 trillion.

Fed officials state that if private lending institutions’ demand for reserves rises, further expansion of the balance sheet is not ruled out.

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