Fed Governor Barr Warns Balance-Sheet Cuts Could Threaten Financial Stability, Bank Resilience

The Federal Reserve uses an ample-reserves regime to control short-term interest rates, while the reserves banks hold at the Fed also serve as a buffer for payments and liquidity. A reserve shortage sent repo rates soaring in September 2019. The Fed reduced its securities holdings by $2.2 trillion from June 2022 to October 2025, making the pace of balance-sheet reduction critical to money-market stability and banks’ ability to withstand stress.

Fed Governor Michael Barr said in a May 14, 2026, speech to the Money Marketeers of New York University that shrinking the balance sheet was the wrong objective. As of March 25, the Fed had $6.657 trillion in total assets and banks held about $3 trillion in reserves. Barr opposed easing liquidity rules or suppressing demand for reserves to enable further balance-sheet cuts, warning that doing so could force the Fed to lend and intervene more frequently, ultimately expanding its market footprint.