--- title: "The Federal Reserve's \"shrinking\" dilemma: Top economists outline a balance sheet reduction roadmap for Waller, with reforms potentially taking up to 5 years" type: "News" locale: "en" url: "https://longbridge.com/en/news/280558645.md" description: "Federal Reserve Chair nominee Walsh may need five years to reduce the $6.6 trillion balance sheet. Top economist Darrell Duffie pointed out that reforming bank liquidity requirements and payment systems is necessary to reduce the Federal Reserve's impact on financial markets. If Walsh is appointed, he could immediately implement some reforms, but other measures may take five years to complete. Investors and observers remain cautious about future developments" datetime: "2026-03-26T03:11:03.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/280558645.md) - [en](https://longbridge.com/en/news/280558645.md) - [zh-HK](https://longbridge.com/zh-HK/news/280558645.md) --- > Supported Languages: [简体中文](https://longbridge.com/zh-CN/news/280558645.md) | [繁體中文](https://longbridge.com/zh-HK/news/280558645.md) # The Federal Reserve's "shrinking" dilemma: Top economists outline a balance sheet reduction roadmap for Waller, with reforms potentially taking up to 5 years According to the Zhitong Finance APP, Federal Reserve Chairman nominee Kevin Warsh has stated that he hopes to significantly reduce the Federal Reserve's $6.6 trillion balance sheet; a top financial economist has indicated that he may need more than one term to accomplish this task. Darrell Duffie, a professor at Stanford Business School and a long-time advisor to the Federal Reserve, pointed out in a new paper that if the Federal Reserve wants to significantly reduce its influence in financial markets without causing severe stress, it will need reforms, including a complete overhaul of bank liquidity requirements and a redesign of the payment system. Once Warsh is appointed by the U.S. Senate, he can immediately implement some reforms as long as he has the support of his colleagues. Duffie stated that other reforms may take up to five years, meaning this work will continue beyond Warsh's four-year term as chairman. "This is akin to overhauling the world's largest payment system," Duffie said during a conference call with reporters on Monday when discussing one of the measures he proposed. "You can't just write a few lines of code and plug them back into the system and expect it to work. It requires extensive testing." In a paper published by the Brookings Institution on Wednesday, Duffie outlined four recommendations that the Federal Reserve could adopt to reduce banks' demand for cash reserves held in central bank accounts. Currently, banks have about $3 trillion deposited at the Federal Reserve, partly due to liquidity regulatory requirements imposed after the 2008 financial crisis. Federal Reserve officials have welcomed this arrangement as it also provides a simpler way to control short-term interest rates. During the search for a new Federal Reserve chairman, Trump indicated that the ability to lower interest rates immediately would be a litmus test for his choice of candidate. The eventual winner, Warsh, believes that reducing the Federal Reserve's balance sheet will pave the way for interest rate cuts. However, he did not elaborate on how this would be achieved. Michelle Bowman, the vice chair for supervision at the Federal Reserve appointed by Trump, and Treasury Secretary Scott Pruitt have also proposed reducing liquidity requirements to lower the demand for reserves. Nevertheless, investors and Federal Reserve watchers are still speculating on how all of this will ultimately unfold. Duffie's paper provides a roadmap. First, the New York Fed could rely more on temporary open market operations, a tool it has used extensively in the past. According to Duffie, this would be the simplest way to smooth out fluctuations in reserve demand and could be implemented in just a few weeks. Next, adjustments will be made to liquidity regulations and supervisory measures. Duffie stated that these adjustments may take months to complete. Additionally, this work will require clear communication with regulators to avoid penalizing banks for using tools like the Federal Reserve's discount window. Although financial markets have long encouraged the use of the discount window, it has historically carried a stigma. The Federal Reserve could also choose to pay lower interest rates on reserve balances that exceed specific targets or quotas. Duffie indicated that these measures could be implemented quickly, but achieving broad consensus on their design and communication is likely to take years Finally, the Federal Reserve could follow the example of other central banks (such as the Reserve Bank of New Zealand) by introducing a liquidity-saving mechanism in its payment system. However, Duffie stated that this would require changes not only from the Federal Reserve but also from commercial banks, and it could take as long as five years. "Unless you reduce the demand for reserves, there's not much you can do," Duffie said when discussing Walsh's desire to shrink the Federal Reserve's balance sheet. "You might adopt one or two of the suggestions first, which could have some effect," he referred to the four suggestions made by Walsh. 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