Fed’s Miran Calls for More Treasurys, Less Reserves for Banks

Federal Reserve Governor Stephen Miran emphasized the need for banks to hold more U.S. Treasurys and fewer reserves, citing regulatory constraints that hinder the Federal Reserve’s ability to reduce its balance sheet effectively. Speaking at a Bank Policy Institute event on November 1, 2023, he argued that current banking regulations influence monetary policy outcomes and create unnecessary demand for reserves.

Miran’s remarks come as the Federal Reserve plans to conclude its “quantitative tightening” on December 1, 2023. He expressed support for this decision and indicated that he would have preferred to halt the runoff of the Fed’s balance sheet sooner, during the Federal Open Market Committee’s October meeting.

While addressing the audience, Miran pointed out that excessive reserves result from regulations that incentivize banks to hold more cash than needed. He stated, “For all the talk about fiscal dominance of monetary policy, the reality is that the size of the balance sheet is a result of regulatory dominance.” The governor believes that easing certain regulations, particularly those related to liquidity and capital requirements, would motivate banks to invest more in Treasurys, which could yield higher returns.

Miran also highlighted that the current large balance sheet necessitates significant interest payments to the banking sector. He remarked, “This is little different for banks’ income than if they held Treasurys directly.” He further explained that an upward-sloping yield curve suggests that banks would benefit more from holding Treasurys rather than maintaining excess reserves.

The Federal Reserve’s regulatory body has already begun to relax various oversight tools in recent months. This includes adjustments to the stress-testing models used to evaluate the resilience of major U.S. banks. Additionally, the Fed plans to reduce staffing in its supervision and regulation division by 30% by the end of 2026.

Miran underscored that these shifts in oversight could help address perceptions that the Fed is providing undue financial support to the banking sector. He warned that these perceptions could undermine the central bank’s credibility and its effectiveness in managing monetary policy. “Several times now, the Senate has debated whether the Fed ought to be stripped of its statutory authority to pay interest on reserve balances,” he noted, emphasizing the importance of this tool for controlling the federal funds rate.

Looking ahead, Miran anticipates that the Fed will continue to make progress in reducing regulations, which he believes will allow the optimal level of reserves to decrease further. He concluded, “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.”

These discussions highlight the intricate relationship between regulation and monetary policy, as well as the potential implications for the banking sector and the economy at large.