Fed's Barr says wrong to lower liquidity rules to shrink Fed holdings

Federal Reserve Vice Chair for Supervision Michael Barr warned on Wednesday that easing liquidity rules to shrink the central bank’s $6.7 trillion balance sheet would “undermine bank resilience” and “ultimately, threaten financial stability.” The remarks were a direct rebuke of proposals backed by incoming Fed chair nominee Kevin Warsh.

Speaking to the Money Marketeers of NYU in New York, Barr argued that regulatory rollbacks should not be used as a lever to accelerate balance sheet reduction.

“I think shrinking the balance sheet is the wrong objective, and many of the proposals to meet this objective would undermine bank resilience, impede money market functioning, and, ultimately, threaten financial stability,” Barr said.

The Fed’s balance sheet peaked near $9 trillion in the summer of 2022 after pandemic-era quantitative easing. More than $2 trillion has been shed through quantitative tightening since, leaving the total at $6.7 trillion. Warsh and departing governor Stephen Miran have argued that loosening regulatory requirements — particularly liquidity coverage ratios — could allow the Fed to shrink its holdings more quickly.

Barr disagreed. “If anything, the bank stresses of 2023 suggest that liquidity requirements should go up and not down,” he said.

He also pushed back on using the balance sheet’s size as a yardstick, saying “the size of the Fed’s balance sheet is the wrong measure of the Fed’s footprint in financial markets.”

The remarks land weeks before Warsh is expected to take over as Fed chair, pointing to a likely fight over the post-crisis regulatory rulebook.