According to the Zhitong Finance APP, as discussions on the Federal Reserve's policy framework continue, Dallas Federal Reserve President Logan stated that the U.S. central bank can reduce banks' demand for reserves by adjusting regulatory rules, thereby achieving a contraction of the balance sheet without reverting to a &#34;scarce reserves&#34; system.
In a speech, Logan pointed out that the current &#34;ample reserves&#34; framework remains efficient and effective, having proven over nearly two decades that it can stabilize money market rates within the target range set by the Federal Open Market Committee (FOMC). Therefore, compared to returning to the pre-financial crisis model, reducing banks' reliance on reserves to &#34;shift the demand curve inward&#34; is a better choice.
In recent years, the size of the Federal Reserve's balance sheet has become a focal point of policy discussions. Since the expansion of the balance sheet through large-scale asset purchases during the financial crisis and the pandemic, how to reasonably shrink the balance sheet has become a key concern for officials and some legislators. Although most opinions suggest that the balance sheet can be further contracted, there are still significant differences regarding the specific path.
For example, Kevin Warsh, a potential Federal Reserve chair nominee appointed by President Trump, has stated that reducing the size of the balance sheet could open up space for future interest rate cuts. Meanwhile, Logan and her team have proposed various technical paths in related research, focusing on optimizing institutional design rather than simply tightening liquidity.
Logan believes that banks' demand for reserves can be reduced by streamlining some liquidity regulatory rules, while also adjusting emergency financing tools such as the discount window to enhance the efficiency of liquidity usage. Additionally, she affirmed the role of the Federal Reserve's existing short-term financing mechanisms in improving intraday liquidity.
However, she emphasized that reserves held by banks for regulatory and prudential reasons are crucial for preventing risk spillover during financial stress and should not weaken this &#34;safety buffer.&#34; &#34;The allocation of reserves that can enhance the safety of the banking system is an effective use of the balance sheet,&#34; she stated.
She also pointed out that some liquidity rules have actually increased reserve levels without enhancing system safety, as banks are often reluctant to use these funds during crises. Such arrangements represent inefficient use and should be considered for optimization.
Furthermore, regarding recent suggestions to set a cap on interest payments on reserves, Logan expressed criticism, stating that this is akin to &#34;central planning&#34; and may stifle innovation, growth, and competition within the financial system

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Dallas Federal Reserve President Logan proposed reducing banks' demand for reserves by adjusting regulatory rules to achieve a contraction of the Federal Reserve's balance sheet without returning to a "scarce reserves" system. She believes that the existing "ample reserves" framework is effective and efficient in stabilizing money market rates. Logan emphasized that optimizing liquidity regulation rules can enhance the safety of the banking system while avoiding undermining the role of reserves as a risk buffer

- Dallas Fed President Logan highlighted the Fed's ability to adjust regulatory rules to reduce banks' reserve demand for balance sheet contraction without reverting to a "scarce reserves" system.  
- She emphasized that the current "ample reserves" framework is functioning effectively, stabilizing interest rates within the FOMC's target range over the past two decades.  
- Logan advocated for optimizing liquidity regulations while maintaining reserves as a critical safety buffer during financial stress, criticizing proposals to limit interest on reserves as potentially harmful to financial innovation and competition.

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New Ideas for the Federal Reserve's Balance Sheet Reduction! Logan Proposes "Reducing Demand" as an Alternative to Tightening Liquidity