What is the White House's stance? Federal Reserve Board Member Miran: The Federal Reserve's "$7 trillion balance sheet" can be reduced by $2 trillion without triggering market turmoil.

Ask AI · How does the White House vision influence the consistency of the Federal Reserve’s policy direction?

There is growing support within the Federal Reserve for sharply reducing its balance sheet, and it is highly aligned with the White House’s stance.

On Thursday, March 26, Federal Reserve Governor Miran said that by loosening liquidity supervisory requirements, lowering the use of central bank lending tools, and other measures, the Federal Reserve’s balance sheet could ultimately be reduced by $1 to $2 trillion from its current level of about $7 trillion.

He noted:

Once the process is started, I recommend a slow pace of balance sheet reduction to ensure the private sector can fully absorb the securities released by the Federal Reserve.

He said:

I’m excited about the possibility of all this happening, but if it does, I hope it happens slowly.

Miran added that the Federal Reserve needs to provide the market with clear guidance on “how the new mechanism will work.” He also emphasized that the related plan still requires “in-depth research and careful calibration,” and that the implementation is expected to take “several years.”

Previously, Federal Reserve Governor Waller said that easing liquidity requirements could reduce banks’ need for reserves, but the magnitude would only be about $600 billion.

According to reports, Miran’s estimates are based on research he co-authored with other Federal Reserve economists, which is far larger than other central bank officials’ estimates.

Worth noting is that Woush, the next Federal Reserve chair nominee proposed by Trump, also supports reducing the size of the balance sheet; he backs moving forward with this process in a cautious manner to avoid shocks to financial markets.

U.S. Treasury Secretary Bessent has also previously called for a review of U.S. liquidity regulatory rules. The high degree of alignment among the three parties has significantly increased outside interest in discussions about the Federal Reserve’s balance sheet policy direction.

The historical expansion of the balance sheet

The Federal Reserve’s balance sheet has undergone several rounds of large-scale expansion since the 2008 financial crisis. Back then, the Federal Reserve launched multiple rounds of quantitative easing, injecting liquidity into the market through large-scale bond purchases.

After the COVID-19 pandemic, the balance sheet’s size rose to a record high of about $9 trillion, and the Federal Reserve at one point became the largest holder of U.S. Treasuries.

**** (The Federal Reserve’s balance sheet at one point surged to a record high of $9 trillion)

After that, the Federal Reserve launched a three-year quantitative tightening plan, allowing maturing bonds to roll off naturally without reinvestment, in an effort to compress the balance sheet to near pre-pandemic levels.

However, that process was halted last year. At the time, volatility emerged in the short-term funding markets, and some banks’ funding costs clearly exceeded the Federal Reserve’s target range, forcing the Federal Reserve to hit the brakes. Currently, the Federal Reserve’s balance sheet is about $6.7 trillion.

Federal Reserve officials said that if private borrowing institutions’ demand for reserves rises, they do not rule out the possibility of further balance sheet expansion.