There is a growing voice within the Federal Reserve pushing for a significant reduction of the balance sheet, which aligns closely with the White House's stance.
On Thursday, March 26, Federal Reserve Governor Miran stated that through measures such as easing liquidity regulatory requirements and reducing the use of central bank lending tools, the Federal Reserve's balance sheet could eventually be reduced by $1 trillion to $2 trillion from its current scale of approximately $7 trillion.
He pointed out:
<blockquote>
Once the process begins, I suggest a slow pace of reduction, ensuring that the private sector can fully absorb the securities released by the Federal Reserve.
</blockquote>
He stated:
<blockquote>
I am excited about all of this happening, but if it does happen, I want it to be slow.
</blockquote>
Miran added that the Federal Reserve needs to provide clear guidance to the market on &#34;how the new mechanism will operate.&#34; He also emphasized that the relevant plan still requires &#34;deep research and cautious calibration,&#34; and the implementation process is expected to take &#34;several years.&#34;
Previously, Federal Reserve Governor Waller stated that relaxing liquidity requirements is expected to reduce bank reserve demand, but only by about $600 billion.
According to reports, Miran's estimate is based on research he co-authored with other Federal Reserve economists and is much larger than the estimates from other central bank officials.
It is worth noting that Warsh, the nominee for the next Federal Reserve Chair nominated by Trump, also advocates for reducing the size of the balance sheet. He supports advancing this process prudently to avoid shocks to the financial markets.
U.S. Treasury Secretary Bessent has also previously called for a review of U.S. liquidity regulatory rules. The high degree of consistency among the three parties' positions has significantly heated up discussions regarding the Federal Reserve's balance sheet policy direction.
<h2>Historical Expansion of the Balance Sheet</h2>
The Federal Reserve's balance sheet has undergone several large-scale expansions since the 2008 financial crisis. At that time, the Federal Reserve launched multiple rounds of quantitative easing operations, injecting liquidity into the market through large-scale bond purchases.
Following the COVID-19 pandemic, the balance sheet size climbed to a historical peak of approximately $9 trillion, and the Federal Reserve once became the largest holder of U.S. Treasuries.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/026d9ff3-0665-46ed-8f0e-5630d77da5ff.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/026d9ff3-0665-46ed-8f0e-5630d77da5ff.png"/>(The Federal Reserve's balance sheet once soared to a historical peak of $9 trillion)
Since then, the Federal Reserve launched a three-year quantitative tightening program, allowing maturing bonds to naturally expire without renewal, attempting to compress the balance sheet toward pre-pandemic levels.
However, this process was halted last year. At the time, fluctuations occurred in the short-term funding market, and the funding costs for some banks significantly exceeded the Federal Reserve's target range, forcing the Federal Reserve to hit the brakes. Currently, the Federal Reserve's balance sheet size is approximately $6.7 trillion.
Federal Reserve officials stated that if private lending institutions' demand for reserves increases, further balance sheet expansion cannot be ruled out.

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Federal Reserve Governor Miran proposed that the Fed's balance sheet could be reduced by $1-2 trillion from its current scale of approximately $7 trillion through measures such as easing liquidity regulatory requirements and reducing the use of central bank lending tools. He also emphasized that the relevant plan still requires "deep research and cautious calibration." Once the process begins, he suggests a slow pace of reduction, with implementation expected to take "several years."

- The Federal Reserve is considering a significant reduction of its balance sheet, aligning with the White House's stance.  
- Governor Miran suggested that the balance sheet could decrease by $1 trillion to $2 trillion from approximately $7 trillion, emphasizing the need for a gradual approach to avoid disrupting the private sector.  
- This potential shift has gained traction as key officials, including Treasury Secretary Yellen, unanimously call for a review of U.S. liquidity regulations following the Fed's past expansions, particularly after the 2008 crisis and the COVID-19 pandemic.

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The White House's Philosophy? Fed Governor Miran: Fed's "$7 Trillion Balance Sheet" Could Be Trimmed by $2 Trillion Without Market Turmoil