Federal Reserve Speeches·May 14, 2026, 7:00 PM ET

Barr, Efficient and Effective Central Banking: Beyond the Balance Sheet

Shrinking the Federal Reserve's balance sheet is identified as the wrong objective for reducing the Fed's footprint in financial markets.
Proposals to reduce the balance sheet would undermine bank resilience, impede money market functioning, and potentially increase the Fed's footprint through more frequent lending & interventions.
The Fed's footprint includes its roles in promoting bank safety, running the payment system, supporting financial stability, & serving as the Treasury's fiscal agent, not just balance sheet size.
Reserves are described as the safest & most liquid asset, essential for banking system safety, payment system efficiency, & economic stability.
Supplying reserves is costless to the Fed because earnings from assets like Treasury securities exceed liability costs, with excess earnings returned to taxpayers.
The current ample-reserves regime allows effective monetary policy implementation where short-term rates trade near the interest on reserve balances (IORB) rate.
Operating under a scarce-reserves regime would require complex regulations & frequent interventions, thereby increasing the Fed's market footprint.
Reducing liquidity requirements such as the Liquidity Coverage Ratio (LCR) is rejected as it would decrease bank self-insurance & financial stability.
The Treasury General Account (TGA) size is determined by the Treasury, not the Fed, & attempts to sterilize TGA fluctuations would require frequent large transactions.
Operating with minimally ample reserves risks significant money market volatility & loss of rate control, necessitating more frequent Fed lending.
Technical adjustments like improving daylight overdraft policies or payment infrastructure investments are considered but prioritized against system-wide improvements.
The speech concludes that reducing banking system resilience is the wrong means to achieve any perceived need for a smaller balance sheet.