Can the Fed shrink its balance sheet?
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There's no way to shrink the balance sheet without longer-term Treasury yields going up
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4 itemsCan the Fed shrink its balance sheet?
Fed's Barr warns shrinking balance sheet via liquidity cuts risks stability
Lead — Fed Governor Michael Barr's recent comments underscore a critical stance against proposals to shrink the Fed's balance sheet by loosening liquidity requirements, which he argues could jeopardize financial stability. Per the full note [source], Barr highlighted that reducing liquidity buffers could lead banks to rely more heavily on Fed facilities during market stress, ultimately increasing the central bank's market presence rather than diminishing it. This perspective aligns with the ongoing debate about the Fed's role in financial markets, particularly in light of the 2023 banking stress episode. The desk believes that Barr's defense of current liquidity requirements signals a cautious regulatory environment that may impact bank profitability and market dynamics moving forward.