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

Odaily Planet Daily News: Dallas Fed President Logan outlined on Thursday the paths and options for shrinking the size of the Federal Reserve’s balance sheet, while also noting that the current system is functioning well and would benefit overall financial stability. Logan said the Fed’s current framework for managing financial liquidity is designed to provide a “ample” level of reserves, and that the system is “efficient and effective.” However, even under the existing framework, there are still multiple ways to help reduce the Fed’s holdings, and many of the measures involve rules governing how financial institutions manage their cash reserves. Recent research both inside and outside the Federal Reserve has indicated that, by prompting banks to hold lower reserve levels through regulatory adjustments, the Fed could further shrink its balance sheet under the current framework. Logan said she agrees, saying that the Fed is currently working to make reserve management “more efficient” during periods of stress. She also said that although some liquidity rules increase reserves, they do not enhance safety, because banks are unwilling to use these reserves during a crisis. “This is the inefficient use of the Fed’s balance sheet, and we can completely avoid this situation.” (Jin10)