Overview
- Speaking in New York on Thursday, Fed Governor Michael Barr said lowering bank liquidity requirements to shrink the central bank’s holdings is a bad idea that could endanger financial stability.
- He argued that shrinking the balance sheet for its own sake is the wrong goal and said popular proposals would weaken bank resilience and disrupt the smooth flow of short‑term funding.
- He pointed to the 2023 banking strains as evidence that liquidity buffers should rise, warning that lighter rules would push banks to rely more on Fed lending tools during stress.
- He said the size of the Fed’s portfolio is the wrong way to judge its market footprint and that the better test is how well it controls short‑term interest rates to carry out policy.
- The debate has sharpened as critics, including former governor Kevin Warsh, press for a smaller portfolio, while Fed holdings sit near $6.7 trillion and ongoing Treasury bill purchases help manage market liquidity.