Brookings Outlines Strategy to Shrink Fed Balance Sheet
A Brookings paper outlines how the Fed could shrink its balance sheet through regulatory changes. This comes as new leadership takes over the bank in May.
New research published by the Brookings Institution suggests that the United States central bank can achieve a smaller balance sheet through a combination of regulatory adjustments, payment system modifications, and more frequent market interventions. In a paper authored by Darrell Duffie, a professor at the Stanford University Graduate School of Business, the academic outlined a strategic path to reduce the overall size of the Federal Reserve balance sheet by tempering the market’s high demand for reserves.
To achieve this, Duffie proposed relaxing liquidity rules to make financial institutions more comfortable holding less cash. He also suggested updates to the Fedwire payment system to better align incoming and outgoing payments, which would further decrease the necessity for excess reserves. Other recommendations include lowering the interest rate paid on reserves exceeding specific levels and utilizing temporary open market operations more frequently to manage liquidity, rather than relying on the current automated system.
