US Stock Market | Fed’s Miran lays out roadmap for smaller balance sheet, easier policy

Federal Reserve Governor Stephen Miran has outlined a framework that could allow the U.S. central bank to significantly shrink its balance sheet while potentially enabling a more accommodative monetary policy stance, according to a speech cited by Reuters.

Miran indicated that reducing the financial system’s reliance on high levels of liquidity could create room for the Federal Reserve to scale down its holdings without tightening overall financial conditions excessively. He pointed to a combination of regulatory adjustments, changes to stress testing frameworks, and efforts to normalize the use of central bank liquidity facilities as key levers in this process.

According to Reuters, the proposals include easing liquidity regulations, refining bank stress tests, and encouraging greater use of tools such as standing repo operations and the discount window. These steps, along with more active liquidity management by the Fed, could collectively reduce the need for large reserve balances in the financial system.


Miran suggested that such measures could ultimately translate into a reduction of $1 trillion to $2 trillion in the Fed’s balance sheet over time. However, he emphasized that the transition would likely take several years to implement and would require careful calibration.

The Fed’s balance sheet, which currently stands at around $6.7 trillion, remains elevated after the central bank’s pandemic-era interventions. These measures saw the Fed purchase massive amounts of Treasury and mortgage-backed securities, pushing total holdings to a peak of roughly $9 trillion in 2022.

Miran cautioned that the current size of the balance sheet may distort financial markets and limit the central bank’s ability to respond effectively to future economic downturns, Reuters reported. He advocated for a gradual and largely passive approach to reducing holdings, allowing securities to mature rather than relying on active asset sales, thereby ensuring that private markets can absorb the supply smoothly.

At the same time, Miran highlighted the interaction between balance sheet policy and interest rates. While balance sheet reduction typically has a contractionary effect on the economy, this impact could be offset by maintaining lower policy rates, provided they are not constrained by the effective lower bound.

The discussion comes at a time when the Fed has temporarily shifted away from balance sheet reduction. After an extended period of quantitative tightening, the central bank halted the runoff process last year as pressures began to emerge in money markets. To stabilize conditions and maintain control over short-term interest rates, the Fed resumed purchases of Treasury bills to rebuild liquidity.

While Fed officials have generally supported the current framework for managing interest rates, there remains a debate over the long-term benefits of maintaining or reducing excess liquidity in the system.

Miran clarified that he is not advocating immediate policy changes but rather presenting a menu of options for future consideration. He stressed the importance of evaluating each potential step through detailed cost-benefit analysis before implementation.

His proposals may also gain relevance in the coming leadership transition at the Fed. Kevin Warsh, who has been named as the next Fed Chair following Jerome Powell’s term ending in May, has expressed interest in reducing the central bank’s balance sheet, making Miran’s framework a potential guide for future policy direction.