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Fed's Barr (voter) says smaller Fed balance sheets would likely increase Fed interventions and that reducing liquidity rules to shrink the Fed balance sheet is not a good idea

Fed's Barr expressed concerns about reducing liquidity requirements, indicating that it could lead to increased stability risks rather than improvements.

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Fed's Barr (voter) says smaller Fed balance sheets would likely increase Fed interventions and that reducing liquidity rules to shrink the Fed balance sheet is not a good idea

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Says:

  • Lowering liquidity requirement would simply increase stability risks.
  • If anything, liquidity requirement should go up, not down.
  • Skeptical that liquidity coverage ratio tweak would really affect reserve demand.
  • Smaller balance sheet could drive more money to Fed liquidity facilities.
  • Moving back to scarce reserves would bring lots of trade offs.
  • Fed is working to move balance sheet duration to match broader Treasury market.
  • Creating reserves is costless to Fed.
  • Effective monetary policy implementation is about rate control.
  • Fed monetary policy toolkit has been working well for a long time.
Context

He emphasized that a smaller balance sheet might necessitate more Fed interventions, suggesting that maintaining or enhancing liquidity standards could be vital for effective monetary policy in the current environment. This adds a hawkish tone to future monetary policy discussions, potentially impacting interest rates and risk sentiment in the markets.

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