Fed Official Says Returning to Limited Reserves Involves Major Trade-offs

A senior Federal Reserve official said that shifting back to a limited reserves system would involve major trade-offs. The official stated that liquidity requirements should be strengthened, not weakened. Effective monetary policy execution hinges on rate management, according to the official.

Creating reserves incurs no cost to the Fed, the official said. The monetary policy toolkit has been effective for a long time.

The comments come as policymakers continue to assess the appropriate level of reserves in the banking system. A return to a scarce reserves environment, used before the 2008 financial crisis, would require changes to how the central bank implements policy.

The official emphasized that any such shift carries significant considerations for banks and financial markets. Liquidity rules play a key role in ensuring stability, the official reported. The remarks provide insight into ongoing internal discussions at the Fed about the balance between ample reserves and more limited ones.

No specific timeline for any potential changes was provided.