Fed's Miran proposes strategies for shrinking central bank balance sheet
Stephen I. Miran, Member of the Federal Reserve Board of Governors, outlined strategies for reducing the central bank's balance sheet in a speech on March 26, 2026. He detailed the benefits of a smaller balance sheet and proposed concrete steps for its reduction.
The case for a smaller footprint
Miran argued that reducing the Fed's balance sheet is a desirable and solvable challenge, despite skepticism.
He highlighted benefits such as minimizing market distortions, lowering mark-to-market losses, protecting the boundaries between monetary and fiscal policy, and preserving "dry powder" for future crises.
The speech distinguished between "scarce," "ample," and "abundant" reserve regimes, noting the shift to ample reserves post-2008.
Miran asserted that a significant reduction is possible without necessarily returning to a scarce reserves regime, by lowering the boundaries between these concepts.
He acknowledged increased demand for reserves due to post-crisis regulations but maintained that the challenge is primarily one of imagination and strategy.
Unlocking reduction potential
Miran outlined several concrete steps to facilitate balance sheet reduction, detailed in a co-authored working paper.
These measures include easing liquidity coverage ratio requirements, destigmatizing standing repo operations and the discount window, and conducting more active open market operations.
He suggested the balance sheet could be reduced by $1 trillion to $2 trillion, potentially reaching 15-18 percent of GDP, without returning to a scarce reserves regime.
Miran stressed the importance of a gradual approach, primarily through allowing securities to mature rather than outright sales, to minimize market disruption.
A long road, but a clear vision
Miran presents a detailed, actionable roadmap for balance sheet reduction, moving beyond the common "impossible" narrative.
While the proposed changes are complex and will require significant time for implementation, his speech provides crucial forward guidance on the Fed's long-term strategic thinking.
This clear articulation of options offers valuable insight for market participants and policymakers alike, even if immediate action remains distant.