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

Deep Tide TechFlow message. On April 2, according to data from Jīnshí, Dallas Fed President Logan on Thursday outlined the path and options for the Federal Reserve to reduce the size of its balance sheet, while also noting that the current system is functioning well and will benefit overall financial stability. Logan said the Federal Reserve’s current system for managing financial liquidity is designed to provide “ample” reserve levels, and that the system is “efficient and effective.” However, even under the current system, there are still multiple ways to help reduce the Federal Reserve’s holdings, and many of these measures involve rules that govern how financial institutions manage cash buffers. Recent research both within and outside the Federal Reserve has indicated that, by encouraging banks to hold lower reserve levels through regulatory adjustments, the Federal Reserve could further shrink its balance sheet under the current framework. Logan said she agrees, adding that the Federal Reserve is currently working to make reserve management “more efficient” during periods of stress. She also said that while some liquidity rules increase reserves, they do not enhance safety, because banks are unwilling to use these reserve balances during crises. “This is an inefficient use of the Federal Reserve’s balance sheet, and we can completely avoid this situation.”