Fed Faces a Dilemma: Reducing Its Balance Sheet or Ensuring Financial Stability?
- Fed officials like Christopher Waller and Stephen Miran suggest potential future balance sheet reductions depend on regulatory reforms and economic conditions. - The Fed paused its $2.4T QT program in October 2025, prioritizing market stability over further contraction amid weak labor data and 3% inflation. - Deregulation could enable smaller Fed holdings without destabilizing banks , aligning with broader U.S. efforts to boost private sector flexibility. - Market uncertainty persists over December rate
Federal Reserve Governor Christopher Waller indicated that the central bank might consider resuming the reduction of its balance sheet at a later date, provided that economic circumstances are favorable. His remarks come as policymakers and market participants continue to discuss the Fed’s approach to normalizing its balance sheet after the pandemic, an issue that remains central to current policy debates. Waller pointed out that although the Fed has currently halted its quantitative tightening (QT) efforts, any future moves will be guided by regulatory changes and shifts in financial conditions
The central bank’s balance sheet, which
Fed Governor Stephen Miran, currently on leave from the White House Council of Economic Advisers, highlighted that changes to regulations could be key to enabling additional balance sheet reductions in the future. “Our priority should be to refine regulations and make sure bank balance sheets are adaptable enough for a scenario where the Fed plays a smaller role,” Miran said in prepared remarks. He suggested that loosening financial rules could allow the Fed to decrease its asset holdings without putting the banking sector at risk,
There is ongoing disagreement among investors about when the Fed might next cut interest rates, with Waller supporting a strategy based on economic data. Recent signs of labor market weakness, such as ADP’s report of an average of 11,250 private-sector job losses per week, have increased speculation about a possible rate cut in December. Still, Waller warned against reacting too strongly to individual data releases,
The Fed’s approach to its balance sheet also connects to larger trends in energy and infrastructure. For example,
As the Fed faces these ongoing challenges, its success will depend on maintaining a balance between regulatory adaptability and market stability. Waller’s remarks indicate that while a significant reduction in the balance sheet is not imminent, future actions remain possible if economic and regulatory developments permit.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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