In March 2024, the Federal Reserve’s (Fed) balance sheet reached an amount equivalent to 84% of the nominal GDP of the United States, a significant increase compared to the 24% recorded before the financial crisis. This marked expansion drew the attention of economists and authorities, who are now discussing strategies to reduce this amount without causing severe market impacts.
Stephen Miran, a Federal Reserve governor, indicated that the institution could reduce its balance sheet by around US$ 1 to 2 trillion gradually. During a speech at the Economics Club of Miami, he presented six detailed steps to achieve this reduction, aligned with the article he coauthored, titled A User’s Guide to Reducing the Federal Reserve’s Balance Sheet, published concurrently with the speech.
Besides Miran’s proposals, Darrell Duffie, a professor at Stanford University, suggested four distinct measures to reduce the Fed’s balance sheet in an article released by the Brookings Institution. Meanwhile, Kevin Warsh, nominated for the Federal Reserve chairmanship, expressed support for a gradual asset withdrawal process to avoid volatility in financial markets.
However, the topic of reducing the Fed’s balance sheet also faces political obstacles. Criminal investigations related to a modernization project of the institution revealed a budget overrun exceeding US$ 1.2 billion, although without evidence of fraud. Senator Thom Tillis stated that the continuation of presidential nominations for positions at the Fed is conditional on resolving these inquiries.
In general, the concepts addressed by Miran recapitulated ideas previously presented in November during a Bank Policy Institute (BPI) event. The BPI report also endorses the importance of a gradual process in returning the assets accumulated on the Fed’s balance sheet, reinforcing the necessary caution for financial normalization to occur sustainably.
Other relevant financial and legal topics
The Financial Stability Oversight Council (FSOC) presented a proposal to update the guidelines regulating the designation of non-bank financial institutions deemed systemically important. The measure seeks to improve the supervision of these entities, based on the Dodd-Frank Act, which was created after the 2008 financial crisis to monitor risks that may affect the United States financial system.
Meanwhile, Senators Thom Tillis and Angela Alsobrooks reached a preliminary agreement with the White House on legislation regulating yield-generating stablecoins. However, Coinbase expressed opposition to the yet undisclosed text of this proposal, indicating significant disagreements within the cryptocurrency sector about the new regulatory parameters.
In the judicial area, the New Mexico court sentenced Meta to pay US$ 375 million due to the lack of satisfactory measures to protect children on its platforms. This decision follows another verdict involving the same company and Google in Los Angeles, where both were held responsible for negative mental health impacts linked to prolonged use of social media.
Moreover, the Joint Economic Committee of the US Congress held a hearing to discuss the rise of global fraud, a topic involving coordinated investigations by agencies such as the FBI, the Department of Justice, and the Federal Trade Commission (FTC). The discussion reflected growing concern about international financial crimes affecting both consumers and institutions.
Meanwhile, Sam Fabens was appointed head of communications at the Bank Policy Institute, officially assuming the position on April 20. This move signals changes in the entity’s public relations management, which operates in the banking sector.
Finally, BMO formalized a partnership with Google Cloud and CME Group to develop a tokenized cash platform, operating on a permissioned network. The innovation aims to simplify the movement of institutional assets and ensure uninterrupted operation, 24 hours a day, which could transform traditional practices in the financial market.
