Fed Balance-Sheet Review Shifts Focus to Bank Reserves

The Federal Reserve expanded its balance sheet through bond purchases after the global financial crisis and the pandemic, then adopted an ample-reserves framework to steer short-term interest rates. Any renewed effort to reduce its footprint involves more than selling or allowing Treasury and mortgage-backed securities to mature. The liability side is equally important because reserve balances — deposits that commercial banks hold at the Fed — must decline without disrupting money markets, credit flows or financial stability.

The Fed on July 9 formed a balance-sheet policy task force co-led by Raghuram Rajan, Karen Dynan and Jeremy Stein to review the costs and institutional implications of the current regime. The central bank’s balance sheet stood at roughly $6.8 trillion in mid-July. Chair Kevin Warsh told Congress on July 14 that the review would include the ample-reserves framework. Analysts and academics say liquidity rules and supervisory incentives must be reworked first so banks can safely hold fewer reserves at the Fed.