MNI BRIEF: Fed's Miran Wants Smallest Balance Sheet Possible

The Federal Reserve should interfere in financial markets as little as possible which means shrinking the balance sheet to the fullest extent it can, Fed Governor Stephen Miran said Wednesday. 

"The Federal Reserve should aim for the smallest footprint it can manage. This means limiting distortions to the provision of credit in the economy -- through large-scale asset purchases," he said in prepared remarks. "Large interest on reserve balances (IORB) outlays may appear like the Fed is unfairly subsidizing the banking system with billions of dollars, even if that’s not the case. These perceptions can affect the Fed’s credibility and thus its effectiveness."

Miran said that because the Fed's regulatory framework has implications for the assets the Fed ultimately holds, discussions about the shape of the balance sheet should come after the transition to a new supervisory blueprint has been achieved. "As we right-size the regulations, my hope is that it will allow us to further reduce the size of the balance sheet, relaxing the grip of regulatory dominance." (See: MNI POLICY: Fed To Start Gradual Asset Purchases Within Months) 

"It has become apparent to me that trying to settle the ongoing debates on how monetary policy is best implemented before settling the regulatory framework is putting the cart before the horse." Miran supported ending the runoff of the Fed’s balance sheet immediately at the FOMC’s October meeting rather than waiting until December 1. 

Miran said making more progress on peeling back regulations could mean a drop in the optimal level of reserves. "It is possible that in the future, it will be appropriate to resume shrinking the balance sheet; stopping runoff today does not necessarily mean stopping it forever," he said. "That would also enable us to reduce our interest payments on reserves."