Federal Reserve Board Governor Waller proposes a USD 5.8 trillion ample-reserves balance sheet and a shift toward Treasury bills

In a speech, Federal Reserve Board Governor Christopher J. Waller set out his framework for explaining why the Federal Reserve’s balance sheet remains far larger than in 2007 and how it should evolve as balance sheet runoff continues. He attributed the increase to two distinct forces that have been conflated in public debate, quantitative easing (QE) and the shift to an ample-reserves operating regime, while arguing that the balance sheet can shrink further but cannot plausibly return to its pre-crisis size relative to GDP. Waller cited the balance sheet at around USD 6.7 trillion (about 22 percent of nominal GDP), down from nearly USD 9 trillion in early 2022, versus about USD 870 billion (6 percent of GDP) in 2007. He highlighted “autonomous” liabilities outside the Federal Reserve’s control as key drivers of a higher floor, including currency outstanding of USD 2.3 trillion at end-2024 and a Treasury General Account (TGA) that fluctuated between roughly USD 650 billion and USD 950 billion in 2024 (average around USD 780 billion) and recently fell to about USD 325 billion due to the debt ceiling, with a rebuild expected in the coming weeks. Using the 2019 episode of money market stress as a reference point, he suggested reserves likely need to stay above a buffered threshold of about 9 percent of GDP (around USD 2.7 trillion) to remain “ample,” implying a minimum balance sheet of roughly USD 5.8 trillion (around 19 percent of GDP). He also argued that paying interest on reserves supports market functioning and does not add to the Treasury’s interest burden when reserves are backed by short-term Treasury assets. On the outlook, Waller said current net income losses reflect QE-driven maturity mismatch and interest rate risk, not the ample-reserves framework. With reserve balances near USD 3.4 trillion as of last month (about 11 percent of GDP), he judged that continued passive runoff of maturing and prepaying securities is likely feasible for some time, subject to market monitoring. He framed the larger remaining issue as portfolio composition, pointing to a tilt toward long-duration assets including about USD 2.3 trillion in agency mortgage-backed securities, and suggested the end-state portfolio should shift toward shorter-duration holdings such as Treasury bills, with rebalancing likely gradual unless the Federal Reserve undertakes outright sales.