Federal Reserve Board Governor Barr says shrinking the Fed balance sheet is the wrong goal and warns against easing bank liquidity rules

In a speech, Federal Reserve Board Governor Michael Barr argued that shrinking the Federal Reserve's balance sheet is the wrong objective and that many proposals to do so would weaken bank resilience, impair money market functioning, and raise financial stability risks rather than reduce the Fed's footprint in financial markets. He defended the current ample-reserves framework, saying reserve balances are essential for policy rate control, payment system functioning, and banks' liquidity self-insurance. Barr said reserves make up about USD 3 trillion of the Fed's USD 6.5 trillion liabilities and noted the balance sheet is now growing slowly through Treasury bill purchases to keep pace with demand for liabilities. He distinguished balance sheet size from duration and composition, saying the portfolio should in normal times broadly mirror Treasury issuance, while warning that proposals to cut reserve demand by easing liquidity rules, including changes to the Liquidity Coverage Ratio or allowing lower-quality discount window collateral to satisfy liquidity requirements, would mainly reduce banks' self-insurance. He also said operating with minimally ample reserves or offsetting swings in the Treasury General Account would require more frequent Fed lending or market transactions, increase rate volatility, and risk renewed stress in funding markets.