Easing regulations could lead to smaller Fed balance sheet, Miran says

Federal Reserve Governor Stephen Miran said easing regulatory burdens could make it appropriate to resume shrinking the Fed's balance sheet in the future, though he supported the FOMC's October decision to stop the runoff immediately amid emergent funding-market strains; he cautioned that any future reduction would follow deregulatory changes and ensuring banks' balance sheets can operate with a smaller Fed footprint. Miran noted the Fed cut its policy rate by 25 basis points at the Oct. 28–29 meeting and halted balance-sheet drawdown starting Dec. 1 after quantitative tightening reduced holdings from a roughly $9 trillion peak to about $6.6 trillion today. He argued that smaller Fed holdings would lower interest paid on reserves and, combined with regulatory rollback, could change banks' liquidity needs and reserve-management dynamics—implications that matter for market liquidity, Treasury demand, and the Fed’s perceived role in credit allocation.

Analysis

Federal Reserve Governor Stephen Miran said easing regulatory burdens could enable the Fed to resume shrinking its balance sheet in the future, but only after regulations are pared back and banks' balance sheets are capable of operating with a smaller Fed footprint. He supported the FOMC's October 28-29 decision to cut the policy rate by 25 basis points and to stop the balance-sheet runoff effective December 1, noting the Fed's holdings have fallen from a roughly $9 trillion peak in summer 2022 to about $6.6 trillion today.

Miran highlighted that smaller Fed holdings would lower interest paid on reserves and change banks' liquidity management, implying a structural shift in reserve demand relative to GDP and the size of the banking system. Reuters reporting also notes the Fed ended quantitative tightening amid mounting money-market pressure and said it may need to buy Treasuries in a technical move to manage market liquidity, signaling that liquidity management rather than policy intent drove the pause.

Timing and implementation remain conditional and uncertain: Miran tied any future runoff to concrete deregulatory changes and bank-balance-sheet flexibility, and he acknowledged emergent funding-market signals that motivated an immediate stop to runoff. Investors should therefore treat the prospect of renewed shrinkage as a conditional, medium-term risk rather than an imminent policy path and monitor funding markets, regulatory developments, and Fed communications closely.

Key Decisions for Investors

• Monitor regulatory rollback milestones and supervisory guidance closely and be prepared to adjust exposure to U.S. banks and other liquidity-sensitive financials if deregulatory progress increases the odds of future balance-sheet shrinkage
• Use short-term funding rates, repo activity, and usage of Fed liquidity facilities as real-time signals; consider hedging liquidity and counterparty risk if money-market stress re-emerges
• Maintain flexible duration posture and liquidity buffers: be ready to shorten duration or add yield-curve hedges if balance-sheet shrinkage expectations rise, and conversely reduce yield exposure if the Fed resumes Treasury purchases to inject liquidity