Dallas Federal Reserve President Lorie Logan laid out a range of options for shrinking the U.S. central bank’s balance sheet, while stressing that the existing system for managing liquidity functions well and contributes to overall financial stability.
Logan’s remarks, delivered at an event at the Dallas Fed and circulated in prepared text, focused on how the Federal Reserve should use its balance sheet to serve the public and support a robust economy and financial system. "When it comes to the balance sheet, as with all of the Fed’s work, the focus needs to be on how we can best serve the public and support a strong economy and financial system," she said.
She reiterated the principle that the balance sheet should be deployed efficiently. "We should use our balance sheet efficiently and effectively," Logan said, adding that "balance sheet growth isn’t bad if it serves the public, but neither should we waste balance sheet space and let it be a distraction from our mission."
Current framework and recent history
Logan described the Fed’s operational framework, which seeks to provide an "ample" level of reserves, as "efficient and effective." That framework was formalized in 2019 and is intended to ensure the financial system has sufficient liquidity to allow the central bank to maintain full control of its policy interest rate target while tolerating reasonable levels of money-market interest-rate volatility.
The Fed expanded its holdings sharply during the COVID-19 pandemic, more than doubling its balance sheet to roughly $9 trillion by 2022. After that peak, the central bank began allowing bonds on its books to mature without replacement, a step that reduced holdings. Fed assets are now about $6.6 trillion, and bank reserves have been hovering around $3 trillion for some time.
Despite delivering on interest-rate control, the sizable balance sheet has become a point of debate. Logan cautioned against measures that would pressure banks to economize on reserves, arguing that "pressing banks to economize on reserves would only increase risk in the system."
Options to reduce the Fed’s footprint
Logan said there are avenues within the existing framework that could reduce the size of the Fed’s holdings. Much of the discussion she sketched centers on the rules and incentives that govern how financial institutions manage their cash buffers.
Recent research both inside and outside the Federal Reserve has argued that regulatory adjustments could induce banks to hold lower reserve balances. Such a shift in demand for reserves, the research contends, would enable the central bank to further shrink its balance sheet while keeping the operational advantages of the ample-reserves system.
Logan signaled agreement that regulatory changes could play an effective role. She pointed to ongoing Fed work aimed at making reserves management "more efficient," particularly in periods of stress.
She also highlighted another potential lever: broadening access to Fed liquidity facilities. Logan suggested that expanding the availability of facilities such as discount window lending and other liquidity operations could reduce the incentive for financial firms to maintain large cash stockpiles. Work on these efforts, she said, is under way.
"Shifting the demand curve inward through steps like these holds substantial promise for reducing reserves while maintaining the benefits of the ample reserves framework," Logan said, while noting that the interactions among such changes are complex and can complicate attempts to estimate long-run gains.
Political and leadership context
Logan’s comments come amid broader discussion inside and outside the Fed about the size and management of the central bank’s holdings. The Fed is operating in an unusual position of showing losses on its portfolio, a development observers have noted as tied to the large balance sheet and current interest-rate environment.
Kevin Warsh, who has been tapped to succeed the Fed chair when the current chair’s leadership term ends in May, has publicly criticized the central bank’s balance sheet management and expressed a preference for smaller holdings.
Conclusion
Logan framed the challenge as one of preserving the operational and stability benefits of an ample-reserves framework while exploring ways to reduce the balance sheet footprint. She emphasized caution about steps that would force reserve drawdowns in a way that could raise systemic risk and underscored that several practical adjustments - notably regulatory changes and expanded liquidity access - could lower reserves without abandoning the current framework. Yet she also warned that estimating the long-run benefits of any changes is complicated by the complex interactions among policy tools and market behavior.