Fed’s Barr warns shrinking balance sheet via liquidity cuts risks stability
Fed Governor Barr said lowering liquidity rules to shrink the Fed's balance sheet is misguided and would increase financial stability risks, arguing the current policy framework has served markets well.
Summary:
Federal Reserve Governor Michael Barr comments, delivered in New York on May 14:
- Barr said shrinking the Fed balance sheet is the wrong objective, and many proposals to achieve it would undermine bank resilience and threaten financial stability
- Lowering liquidity requirements to reduce Fed holdings would likely push banks toward Fed liquidity facilities in times of stress, increasing rather than reducing the central bank's market footprint
- The 2023 bank stress episode points to liquidity requirements needing to go up, not down
- Balance sheet size is the wrong measure of the Fed's footprint; the real focus should be on effective rate control and policy implementation
- The Fed is working to align its balance sheet duration with the broader Treasury market
- The current monetary policy implementation framework has worked well for many years and supports smooth market functioning
Federal Reserve Governor Michael Barr delivered a pointed defence of the central bank's current balance sheet framework on Thursday, arguing that proposals to shrink Fed holdings by loosening bank liquidity rules are misguided and could actively damage financial stability.
Speaking before the Money Marketeers of New York University, Barr acknowledged that reducing the Fed's footprint in financial markets has become a prominent topic of debate. He was unambiguous in his assessment: shrinking the balance sheet for its own sake is the wrong goal, and the most commonly discussed means of achieving it would make the financial system less safe, not more streamlined.
At the heart of Barr's argument is the relationship between liquidity requirements and systemic risk. Allowing banks to hold less liquidity as a mechanism for reducing reserve levels would, in his view, make those institutions more likely to lean on Fed facilities when conditions deteriorate, a dynamic that would ironically expand the central bank's role in markets rather than reduce it. He pointed directly to the bank stress episodes of 2023 as evidence that liquidity buffers need strengthening, not trimming. If anything, he said, requirements should move higher.
Barr also challenged the premise that balance sheet size is the right way to measure how deeply embedded the Fed is in financial markets. In a system where creating reserves is effectively costless, the more meaningful gauge is how well the Fed is able to control short-term interest rates and implement monetary policy. On that measure, he argued, the current framework has performed reliably for years, supporting both policy objectives and the smooth functioning of money markets.
He added that returning to a system of scarce reserves, as some proposals imply, would involve significant trade-offs that advocates tend to understate. The Fed is also working to shift its balance sheet duration to better match the profile of the broader Treasury market, a technical adjustment aimed at improving the coherence of its market presence.
The overall thrust of Barr's remarks was a defence of the status quo against proposals that he sees as prioritising the appearance of a reduced Fed footprint over the substance of financial resilience.
Not the b/s he is referring to ;-)
---
Barr's pushback against loosening liquidity requirements adds a dissenting voice to debates around reducing the Fed's footprint, a discussion with direct implications for bank funding costs and money market dynamics. A move toward scarcer reserves would introduce significant trade-offs for short-term funding markets, potentially lifting volatility in overnight rates and increasing banks' reliance on Fed facilities in stress periods. The 2023 banking stress episode looms large in Barr's framing, and his call for liquidity requirements to go up rather than down signals continued regulatory conservatism that could weigh on bank profitability expectations. For bond markets, the Fed's stated intention to align its balance sheet duration with the broader Treasury market is a signal worth monitoring.
This article was written by Eamonn Sheridan at investinglive.com.提供 MainLink：Investinglive RSS Breaking News Feed
FX初心者には必須 無料のうちにGET！
