Fed Governor Pushes Back Against Proposals to Shrink Central Bank Balance Sheet

A Federal Reserve governor on Thursday opposed proposals to reduce the size of the central bank's balance sheet. The governor described the ideas as wrong and said they would threaten financial stability. The balance sheet grew substantially during periods of economic stress when the Fed purchased large amounts of securities to support markets and the economy.

It has remained elevated compared with pre-pandemic levels even after years of gradual reduction through a policy of allowing securities to mature without full reinvestment. Officials have previously indicated that they expect to slow the pace of runoff at some point to avoid abrupt effects on short-term money markets.

The governor's remarks on Thursday reinforced caution about accelerating that process or actively selling securities.

The comments reflect one view inside the central bank as policymakers continue to monitor how balance sheet policy interacts with the federal funds rate and overall liquidity conditions. No immediate policy change was announced. Discussions about the appropriate long-run size of the balance sheet have continued since the Fed began normalizing policy after the financial crisis and again after the pandemic response.

The governor warned that shrinking it too far could limit the central bank's ability to respond effectively in future periods of market stress.