Overview
- Fed Governor Stephen Miran, in a Thursday speech in Miami, said a slower, passive approach could cut the Federal Reserve’s $6.7 trillion balance sheet by $1 trillion to $2 trillion over time.
- He pointed to easing liquidity rules and stress tests, lowering the interest paid on excess reserves, and normalizing use of the discount window and standing repo as ways to curb the system’s need for cash.
- He also backed more frequent temporary open market operations and changes to Fedwire that better match incoming and outgoing payments, which would let banks hold fewer idle balances.
- Miran said a smaller portfolio tightens financial conditions, so the Fed could set a lower policy rate than otherwise if it is not near the zero lower bound.
- Stanford’s Darrell Duffie laid out a similar playbook in a Brookings paper on Wednesday, highlighting 2019’s funding squeeze as a warning to shrink without draining liquidity too fast.