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

ME News update. On April 2 (UTC+8), Dallas Fed President Logan Thursday outlined the path and options for shrinking the Federal Reserve’s balance sheet, while simultaneously noting that the current system is functioning well and bringing benefits to overall financial stability. Logan stated that the Fed’s current framework for managing financial liquidity aims to provide an “ample” level of reserves, which is “efficient and effective.” However, under the existing system, there are still multiple ways to help reduce the Fed’s holdings, many of which involve rules governing how financial institutions manage cash reserves. Recent research both inside and outside the Fed has indicated that, through regulatory adjustments, the Fed could further shrink its balance sheet by encouraging banks to hold lower reserve levels under the current framework. Logan agreed, adding that the Fed is actively working to make reserve management “more efficient” during periods of stress. She also mentioned that some liquidity rules, although 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—we can completely avoid this situation.” (Jin Shi) (Source: ODAILY)