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

ME News message, April 2 (UTC+8). Dallas Fed Chairman Logan on Thursday outlined the path and options for the Federal Reserve to reduce the size of its balance sheet, while noting that the current system is operating well and that it will benefit overall financial stability. Logan said the Fed’s current framework for managing financial liquidity is designed to provide a “ample” level of reserves, a system that is “efficient and effective.” However, even under the current framework, there are multiple ways to help reduce the Fed’s holdings, and many of these measures involve rules governing how financial institutions manage their cash reserves. Recent research inside and outside the Fed indicates that, under the current framework, the Fed could further reduce the balance sheet by encouraging banks to hold lower reserve levels through regulatory adjustments. Logan said she agrees, saying the Fed is currently working to make reserve management “more efficient” during periods of stress. She also said that some liquidity rules, while increasing reserves, do not improve safety because banks are unwilling to use those reserves during a crisis. “This is inefficient use of the Fed’s balance sheet, and we can completely avoid this situation.” (Jinshi) (Source: ODAILY)