Baal says that loosening liquidity regulations to reduce the Federal Reserve's balance sheet size is a bad idea and could harm the safety of the financial system. He points out that shrinking the balance sheet is not an end goal, and related plans could weaken bank resilience, hinder money market operations, and even increase the Fed's influence in the market, warning that relying on bank liquidity holdings as an alternative to reduction could increase dependence on Fed tools. He emphasizes focusing on the effectiveness of monetary policy rather than the size of the balance sheet.

MeNews

2026-05-20 12:08:37

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ME News Report, May 15 (UTC+8), Federal Reserve Board Member Bull stated that relaxing liquidity regulations to reduce the central bank's balance sheet size is a bad idea and could harm the safety of the financial system. "Recent discussions about shrinking the Federal Reserve's balance sheet to reduce our 'footprint' in the financial system have been rampant," Bull said in a speech at a conference hosted by the New York University Money Market Association. "I believe reducing the balance sheet is the wrong goal, and many of the proposed solutions to achieve this will weaken banks' resilience, hinder normal functioning of the money markets, and ultimately threaten financial stability," Bull stated, "some proposals actually increase the Fed's 'footprint' in the financial markets." Bull pointed out that allowing banks to reduce liquidity holdings as a means to shrink the Fed's assets could increase the risk of these institutions turning to the Fed's liquidity tools in times of trouble. He said, "The size of the Fed's balance sheet is not the correct measure of its influence in the financial markets," and under a system where the Fed creates reserves "at no cost," the real focus should be on the effectiveness of the Fed's monetary policy. (Source: Jin10)

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ReflectiveKey

· 9h ago

Understood, shrinking the table is a means, not a KPI; pushing hard will only create new vulnerabilities.

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GovernanceMoodboard

· 12h ago

Has the reduction in bank liquidity holdings been replaced?
Translation: Let banks hold more reserves, then the Federal Reserve takes them back, what's the point of going in circles.

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NeonMint

· 14h ago

The key point in the last sentence—only effective monetary policy truly matters; the size of the table is just a result, not a grading criterion.

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TheSkyInsideTheMirroredSphere

· 18h ago

Bahr is clearly saying: Don't shrink the balance sheet just for the sake of shrinking it; otherwise, the Federal Reserve itself becomes the biggest market maker, which is more centralized.

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HotAirBalloonViewing

· 18h ago

If the resilience of the banks is weakened, who will backstop the next crisis?

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QuantsAndCats

· 18h ago

Reducing the table ≠ the goal; someone finally explained this clearly.

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RugpullTaster

· 18h ago

If the operation of the money market is hindered, short-term financing costs will directly skyrocket, and DeFi players all understand how painful liquidity fractures can be.

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GateUser-9076f8b9

· 18h ago

Focusing on the effectiveness of monetary policy rather than its apparent size is a point worth highlighting.

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NightFlightMint

· 18h ago

So the core contradiction is: wanting to appear small, but not wanting banks to fail, and also wanting the market not to collapse — the impossible triangle indeed.

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RedGlass

· 18h ago

This move by Bal is a professional sabotage; shrinking the balance sheet was never the goal. Forcing it aggressively will only drain the banks' liquidity, and in the end, everyone will rely on Federal Reserve tools. Doesn't that just turn the left hand into the right hand?

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Federal Reserve Board Member Bullard: The goal of balance sheet reduction is wrong or will lead the Fed to more interference in the markets

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