The first is through the supply of money and liquidity, the liability side of the Fed’s balance sheet, in a classic monetarist sense. Reserves are high-powered money, and increasing their supply is an expansion of the money supply.
RIP_Soulja_Slim on
>The first question is, how much could we shrink the balance sheet? I think quite a lot, but that does not necessarily mean returning it to its share of gross domestic product (GDP) before the financial crisis. I see dipping to that level as not feasible. The growth in currency demand, the post-crisis regime put in place by the Dodd-Frank Act and reforms to the Basel standards, and the resulting changes to market structures and expectations all resulted in greater demand for reserves in the system.
>The second question is, does reducing the balance sheet from here necessitate a return to scarce reserves? I argue not necessarily. Instead, the Fed can take steps to reduce the lines that demarcate scarce, ample, and abundant. Lowering these boundaries can be done through a variety of policies that I’ll touch on soon. Shifting these boundaries down would allow for retaining an ample-reserves policy while reducing the size of the balance sheet.
Miran’s total thought here is more or less that we need to reduce reserve requirements so that the Fed can shrink the balance sheet. The balance sheet has expanded precisely because reserves were too low. So absent the Fed swapping reserve credits for treasuries you end up with lending constraints in the overnight market (see instances of the Fed stepping in to Repo markets).
Miran’s not fully incorrect here, but he is effectively lobbying for reductions across the board in various liquidity ratios and reserve requirements. Some of those ratios are highly problematic and should be revisited, some are perfectly fine, Miran’s not really coming at this with a scalpel though.
2 Comments
The first is through the supply of money and liquidity, the liability side of the Fed’s balance sheet, in a classic monetarist sense. Reserves are high-powered money, and increasing their supply is an expansion of the money supply.
>The first question is, how much could we shrink the balance sheet? I think quite a lot, but that does not necessarily mean returning it to its share of gross domestic product (GDP) before the financial crisis. I see dipping to that level as not feasible. The growth in currency demand, the post-crisis regime put in place by the Dodd-Frank Act and reforms to the Basel standards, and the resulting changes to market structures and expectations all resulted in greater demand for reserves in the system.
>The second question is, does reducing the balance sheet from here necessitate a return to scarce reserves? I argue not necessarily. Instead, the Fed can take steps to reduce the lines that demarcate scarce, ample, and abundant. Lowering these boundaries can be done through a variety of policies that I’ll touch on soon. Shifting these boundaries down would allow for retaining an ample-reserves policy while reducing the size of the balance sheet.
Miran’s total thought here is more or less that we need to reduce reserve requirements so that the Fed can shrink the balance sheet. The balance sheet has expanded precisely because reserves were too low. So absent the Fed swapping reserve credits for treasuries you end up with lending constraints in the overnight market (see instances of the Fed stepping in to Repo markets).
Miran’s not fully incorrect here, but he is effectively lobbying for reductions across the board in various liquidity ratios and reserve requirements. Some of those ratios are highly problematic and should be revisited, some are perfectly fine, Miran’s not really coming at this with a scalpel though.