NEW YORK -- Federal Reserve Governor Michael Barr said shrinking the balance sheet is the wrong objective for the central bank, and many of the proposals to meet that objective would threaten financial stability.
Speaking at an event in Midtown Manhattan, Barr delivered the comments after Kevin Warsh's confirmation as Fed chair. Warsh has argued for shrinking the Fed's balance sheet to reduce the central bank's large presence in financial markets. Barr said some of the proposals to shrink the balance sheet would actually increase the Fed's role in markets.
"Many of the proposals to meet this objective would undermine bank resilience, impede money market functioning, and, ultimately, threaten financial stability," a published text of his remarks said.
Barr said in an ample-reserves regime -- the system set in place after the 2008-09 financial crisis -- there should be limited money market volatility in normal conditions. If the Fed were to return to a scarce reserves regime, it would not reduce the Fed's footprint in the market, given the degree of regulation and intervention that would be needed to do so, Barr said.
Without enough reserves in the financial system, Barr said the payment system could suffer, because it would give banks reason to economize on their liquidity by slowing down their outgoing payments, leading to bottlenecks and other stresses in funding markets.
In addition, Barr said if banks do not have enough reserves when depositors ask for withdrawals, a panic can ensue. He added the bank stresses of 2023 suggest that liquidity requirements should go up and not down.
"Shrinking the Fed's balance sheet is the wrong goal, and reducing the resilience of the banking system is the wrong means," he said.
Write to Jessica Coacci at jessica.coacci@wsj.com
(END) Dow Jones Newswires
May 14, 2026 19:04 ET (23:04 GMT)
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