Brookings Proposes Fed Balance-Sheet Cuts to $4.5 Trillion

A Brookings Institution proposal says the Federal Reserve could shrink its balance sheet from about $6.8 trillion to $4.5 trillion and reduce bank reserves from roughly $3 trillion to $1 trillion by replacing its ample-reserves framework with an “Elastic Reserves” system. The approach would make liquidity available on demand and pair changes to the Fed’s rate-control tools with rules allowing banks to hold less cash, rather than relying on a large standing reserve cushion. Author Chris Hughes says the shift could reduce the Fed’s footprint relative to the economy to its smallest level since 2008 and cut interest payments to banks by about two-thirds. The proposal comes as Fed Chair Kevin Warsh seeks a smaller balance sheet and has established a task force to examine changes to the central bank’s operating framework.