Federal Reserve Governor Michael Barr warned Thursday that efforts to shrink the Fed’s balance sheet by easing bank liquidity requirements would be misguided and could ultimately weaken financial stability. Speaking in New York, Barr pushed back against growing debate over reducing the central bank’s “footprint” in financial markets.
“I think shrinking the balance sheet is the wrong objective,” Barr said. He argued that many proposals aimed at reducing Fed holdings “would undermine bank resilience, impede money market functioning, and, ultimately, threaten financial stability.” Barr also warned that some of the proposed changes “would actually increase the Fed’s footprint in financial markets” by making banks more reliant on emergency central bank liquidity during periods of stress.
Barr specifically argued that lessons from the 2023 regional banking turmoil point toward stronger, not weaker, liquidity safeguards. “If anything, the bank stresses of 2023 suggest that liquidity requirements should go up and not down,” he said.
