Economic Club of Miami: Stephen I. Miran, Federal Reserve Board Governor, March 26, 2026

Thank you. So, thank you Francisco for that very kind introduction. It's an honor to be here tonight at the Economic Club of Miami. I'm going to talk about a topic that's too large to ignore, the Fed's balance sheet. Like any other bank, the Fed's balance sheet is a record of assets and liabilities that we hold. The assets are primarily Treasury securities and agency mortgage-backed securities. The liabilities include all US currency in circulation, reserve balances banks hold at the Fed, and the Treasury general account. The size and composition of these holdings matters because they affect the amount of money in the banking system and influence broader financial conditions. Understanding how the balance sheet functions is essential to understanding how the Fed supports economic stability and conducts monetary policy. Today I will discuss the various regimes under which the Fed has operated its balance sheet and explain why in my view shrinking the size of the balance sheet is desirable. Next I will explain why the challenge of shrinking the balance sheet is a solvable one and then I will discuss potential paths forward towards accomplishing that goal. Finally, I'll conclude with the monetary policy implications of such action. Modern balance sheet policy revolves around three somewhat nebulous concepts: scarce, ample, and abundant reserves. Before the 2008 global financial crisis, the Fed operated with scarce reserves. Under that regime, the Fed kept reserves relatively tight and frequently intervened directly in the market, using open market operations to steer the federal funds rate towards its target. After the crisis, the Fed moved to an ample reserves regime in which the banking system holds enough reserves that the Fed does not need to engage in active daily operations to control the policy rate. This system allows the Fed to control short-term interest rates primarily by setting rates at which it will participate in the market or administered rates. During much of the post-crisis period, reserves were also described as abundant or well beyond what's needed for that smooth market functioning. This was because quantitative easing policies dramatically expanded reserve balances. There are numerous reasons why reducing the balance sheet is a worthy goal. We should aim for as small a footprint in markets as possible to minimize government-induced distortions, particularly funding market disintermediation. A smaller balance sheet also helps lower the chances of mark-to-market losses at the central bank and the volatility of remittances to the Treasury. In addition, a smaller balance sheet better protects the boundaries between monetary and fiscal policy by preserving the duration profile of the public debt as a fiscal policy item, keeping the Fed out of the credit allocation game across sectors, and reducing interest payments on reserve balances, which some in Congress view as a subsidy to the banking system. Finally, a smaller balance sheet preserves dry powder for a scenario in which policymakers must again confront the zero lower bound on interest rates. Yet, despite these benefits of a smaller balance sheet, many say it simply cannot be done. It's a pipe dream. It'll never happen. Now, if you tell me something is impossible, I can't help asking, really, is that the case? This trait has gotten me into plenty of trouble before, but I can't help myself. So, let's think through the possibilities here. My topline assessment is that shrinking the balance sheet is indeed a solvable challenge. Those who reject the idea out of hand, I think lack a little imagination. In approaching this challenge, I see three primary questions. The first question is how much could we shrink the balance sheet? I think quite a lot, but that does not necessarily mean returning it to its share of gross domestic product before the financial crisis. I see dipping to that level as not particularly feasible. The growth in currency demand, the post-crisis regime put in place by Dodd-Frank and reforms to the Basel standards and the resulting changes to market structures and expectations all resulted in greater demand for reserves in the system. The second question is does reducing the balance sheet from here necessitate a return to scarce reserves? I argue not necessarily. Instead, the Fed can take steps to reduce the lines that demarcate scarce, ample, and abundant. Lowering these boundaries can be done through a variety of policies that I'll touch on soon. Shifting these boundaries down would allow for retaining an ample reserves balance sheet policy while reducing the size of the balance sheet. And the third question is, is it desirable or even possible to return to a scarce reserves regime? I believe we could return to scarce reserves within the current regulatory institutional framework, but it would entail trade-offs. Those include accepting more volatility in short rates, more tolerance for active management of reserves from the Fed, and more frequent and regular use of Fed-provided liquidity like daylight overdrafts, the discount window, or standing repo operations. How you view the impact of these side effects will inform whether you think returning to scarce reserves is desirable. Is lowering the boundary between scarce and ample easier said than done? Perhaps. But I see a path forward to achieving that goal. Measures that could effectively shift the boundaries down are articulated in a working paper I co-wrote with some of my Federal Reserve colleagues, 'A User's Guide to Reducing the Federal Reserve's Balance Sheet.' These actions include the following steps: easing liquidity coverage ratio and related requirements; bounding internal liquidity stress test expectations and related resolution planning liquidity standards; destigmatizing the standing repo operations, discount window usage and delayed overdraft usage; engaging in more active open market operations, particularly around quarter ends and fiscally significant dates; making it easier for dealers to absorb securities; making alternatives to reserves like Treasury securities more liquid and attractive; and conducting policy with a slightly higher effective federal funds rate relative to the interest rate on reserve balances conditional on a given target range. That is only a sample of the steps that we could take to reduce the size of the Fed's balance sheet. There is much more in the paper and I encourage you to review it. To be clear, both in the user's guide and in these remarks, I'm not advocating any specific step. I'm simply listing options that we were able to identify so that if and when the time comes, the Fed will have some tangible actions we can take to move in that direction. Each option will require its own cost-benefit analysis. Even if Fed policymakers were to opt to return to scarce reserves, taking steps to reduce reserve demand will make it easier to do so and allow the balance sheet to shrink further while minimizing downsides. Some of the options I listed, like destigmatizing repo operations, the discount window and daylight overdraft credit, or conducting temporary open market operations, will also improve the state of the world in a scarce reserves regime. My own lean is toward reducing reserve demand but retaining ample reserves, but it's not a firmly held conviction. Let's return to my first question. How much can the balance sheet be reduced if you're going to reduce the balance sheet? As I said the pre-crisis level is not a realistic benchmark. So instead I'll offer two alternatives. First after the conclusion of the first round of QE the balance sheet was about 15% of GDP. It's possible that this level of the balance sheet was needed to accommodate the liquidity requirements of the financial sector before the second round of QE and subsequent asset purchases began scaling up the balance sheet for the purpose of achieving our dual mandate goals rather than financial stability as the first QE program was. Or before the start of open-ended QE in 2012 and in 2019 before the pandemic the balance sheet was about 18% of GDP. This level in theory reflects the liquidity needs of the banking sector as the scope of Dodd-Frank and Basel requirements became clear before the launch of open-ended QE. It also reflects the scope of possible balance sheet reduction after the crisis but before the pandemic. This level incorporates some of the so-called ratchet effects on the balance sheet but not the ones incurred since the pandemic. Loosely speaking, this range could reflect 1 to 2 trillion dollars of balance sheet reduction from current levels. Numbers that are reasonably provided in the user's guide without needing to return to scarce reserves. Of course, the optimal size of the balance sheet is a subject that warrants much more serious work. And it's possible it's better to scale the balance sheet by a financial variable like bank deposits rather than by GDP. I don't aim to settle this question today. The tools identified in today's user's guide would unlock substantial room to further reduce the balance sheet, which I would like to see. However, in a scenario in which the Fed is shedding securities from its balance sheet, policymakers also need to ensure the financial markets can absorb those securities with minimum disruption. The most important thing we can do will be to go slowly. It is hard to overemphasize how important this is. It also means allowing securities to mature rather than selling them outright, which would realize losses on the Fed's balance sheet. I could imagine selling our securities if we saw them trading at a profit, but not otherwise. Some other steps in the user's guide might make it easier for the market to digest securities from our balance sheet. Now that I've outlined some ideas we expand upon in the user's guide, I'd like to conclude my talk with a few thoughts on how balance sheet operations can affect the economy and monetary policy. I principally see that happening through two channels. The first is through the supply of money and liquidity, the liability side of the Fed's balance sheet. In a classic monetarist sense, reserves are high-powered money and increasing their supply is an expansion of the money supply. The second is through what economists call the portfolio balance channel or the asset side of the Fed's balance sheet. To expand on this concept, at a given set of prices, the private sector has a fixed capacity to absorb additional financial risk, including interest rate risk. The Fed's removal or provision of interest rate risk to the public will therefore affect the private sector's willingness to take financial risk overall. All else equal, reducing the balance sheet has contractionary effects for the economy through both channels. The contractionary economic effects of balance sheet reduction can be offset with a lower federal funds rate so long as we are not at the effective lower bound. It is therefore likely that a resumption of balance sheet reduction warrants additional reductions in the Fed funds rate relative to baseline projections. However, putting magnitudes on these effects is challenging and I'm not going to attempt to do so today. In closing, the benefits of reducing the size of the Fed's balance sheet are clear and in my view achievable. The Fed's balance sheet can shrink, but policymakers should first take steps to make sure they are successful. I've laid out some of these possible steps today and offer further details in the user's guide. Each of those steps is likely to have some cost and benefits and will have to be duly studied and calibrated. Implementing these steps before beginning to reduce the balance sheet means that it will be some time before we can begin. If we decide to go ahead, based on my experience with how government navigates the Administrative Procedure Act, this process is likely to take well over a year once the decision is taken to proceed. It could take several years. That timeline would dictate when the Federal Open Market Committee decides to begin reducing the balance sheet and studying how to implement these changes, including giving markets guidance on how new mechanisms will function. And once the process begins, I would counsel a slow pace of reductions to ensure the private sector can absorb all the securities shed off of our own balance sheet. I'm excited that all of this can happen, but if or when it does, I expect it to proceed slowly. Thank you again to the Economic Club of Miami for the opportunity to speak here this evening, and I look forward to discussing with John.

So thank you. Look, we are expanding the balance sheet now and I voted to resume reserve management purchases in December. I supported that policy and that's because conditional upon the current institutional framework, the regulatory framework, the implementation framework, we had run into an area approaching scarce reserves in December and so if we were going to maintain an ample reserves framework we needed to start reserve management purchases and increasing the quantity of reserves in the system and increasing the balance sheet. Now what I've tried to do in the paper and in the speech is to provide a set of options for reducing reserve demand so that we don't have to keep increasing our balance sheet like this. I go back to shrinking our balance sheet which to me is the right approach. Now once we undertake those options, those steps, I see 1 to 2 trillion of potential reserve reduction while retaining ample reserves which sounds like a good range to me in terms of thinking of reduction but that's the type of thing that would have to be weighed by the committee in the future in terms of what they wanted to do and how far they wanted to go.

So as I said in the speech it's a weak lean and it's certainly not a hill I would die on, it's not even a hill I would take mild wounds on. Part of the reason for that, there's two reasons for that lean. One is that we have ample reserves now. And if we have a path to remaining in ample reserves but reducing the balance sheet by up to two trillion dollars, it seems if something's working reasonably well but you can reduce the balance sheet then it doesn't necessitate an institutional change back to scarce reserves, it seems like less work. And so that seems like a positive to me. The other reason is that we still do live in a world with Dodd-Frank and Basel. And I do think that you could have scarce function in a world of Dodd-Frank and Basel but there's some more questions in my mind. So it's a weak lean and I could be talked into scarce but that's sort of my thinking at the moment and because we're sort of still studying the subject I could imagine my thinking on it evolving as we continue to do more research.

Sure. So I like that framing of it. Let me just repeat it a little bit so that'll make my answer make a little bit more sense. So when we reduce our balance sheet, a balance sheet is assets and liabilities. And if you reduce the balance sheet, you're reducing both assets and liabilities. Now the bulk of the paper deals with the liability side of it, which is reserves. Banks own reserves. Those are assets on the bank side, liabilities on the Fed side. And when we reduce reserves, in the past, we get to a point where there starts to be a little bit of mayhem in short-term funding markets. And that tells you that you're approaching scarce reserves and you need to stop. And most of the options in the paper deal with reducing reserve demand to allow you to reduce the balance sheet further before you get to that. And those are, I listed a number of those in the speech as well without going into details because it's a speech and not a 50-page paper. On the asset side, the Fed owns securities, treasuries and MBS, and you're referring to the taper tantrum that happened in 2013. Big increase in long-term interest rates. And on the liability side, we talked about sort of making sure that repo markets don't go haywire when you're reducing the balance sheet, but you also have to think about the asset side, too. And how do you avoid a spike in long-term interest rates that you don't necessarily want as a result of what you're doing. And so I mentioned going slowly, I think that's important. But I think another thing that you, there's a couple other steps that you can do that we mentioned in our paper and they have to do with some regulatory and implementation things. And so one of them is going to central clearing of treasury repo. Because if you own a treasury on repo you've got a risk charge not for the treasury on the risk-weighted side of the regulatory regime but for the repo exposure, for the counterparty exposure on repo. And if you net across trading partners, you've got a long position with this guy and a short position with that guy, they'll net out and then you won't have the charge and so you reduce the regulatory burden of owning treasuries on repo. That's one thing that you could do that we discussed in the paper. Another is the G-SIB charge on the risk-based side as well. And so treasury securities in the risk-based side of the regulatory framework are supposed to have a zero capital weight because they're treasuries. But they don't actually have a zero capital weight in calculating the G-SIB charge because they make banks more systemically important if you own more treasuries. And so there's a little bit of a distortion to the way that we think about zero risk weight in the risk-based side for treasuries. And so those are some reforms that you could take on the regulatory side that would make it a little bit easier for markets to absorb securities that are coming off of our balance sheet.

Sure. So I still see underlying inflation as gradually moving down toward target over the next, you know, sort of 12 months let's say. I think underlying inflation is remaining very well behaved and with the labor market on a very, very gradually loosening trend for 3 years now, it's very difficult for me to imagine that changing. Now the oil shock of course is very real but the way that oil shocks work when you think about inflation is they boost the price level pretty quickly. Gas prices move up pretty quickly, right? Or airline fares move up pretty quickly. Anything that's really tied to oil in a very, very powerful way tends to move up very quickly. But monetary policy hits the economy with lags, with long and variable lags. And most people think that those are 12 to 18 months. And so what happens with an oil price is it lifts the price level pretty immediately because it feeds through into gas prices and other stuff immediately. But then unless there are second round effects, then you don't have inflation as a result of oil 12 to 18 months out. Inflation 12 to 18 months out is pretty much unaffected. And you see this in inflation expectations. So I like to look at the CPI swap market and one-year swaps moved up a lot. But as you look at forward rates, if you look at the one-year rate one year forward and the one-year rate two years forward and the one-year rate three years forward, they haven't really moved. If anything, they're actually down since the January FOMC. And they haven't really moved much in response to the Iran shock at all. So if we changed interest rates now, it wouldn't hit the economy for 12 to 18 months from now, but the market isn't really seeing any inflation from the oil shock 12 to 18 months from now because it all happens immediately. What you would get is a much weaker economy as a result of tighter monetary policy. And so this is why classically central banks look through oil shocks. And I tend to think that the traditional wisdom on, I mean I'm very as you can tell from the speech and other things that I've said and written in the last several years I'm very happy to challenge conventional wisdom when I think it's wrong. But in this case I think conventional wisdom is right.

So the labor market was extremely tight in 2021-22 and then as the Federal Reserve started its tightening cycle, the labor market set into a very gradual cooling trend. That trend's been in place for three years. I think given labor markets tend to show a lot of momentum, they tend to show a lot of persistence and underlying trend and that this trend has been going on for three years. It seems to me that it should be the null hypothesis when you're thinking about how the labor market has changed. I haven't seen anything that's convinced me that this three-year long trend has adjusted. There are some folks who think the labor market is showing signs of stabilization. I think the trend has continued and therefore merits additional support for monetary policy. Monetary policy is modestly restrictive and I don't think that the labor market really calls for that.

Yeah. So I like model estimates. So, first of all, r-star is the neutral rate of monetary policy. It's the rate that's neither accommodative nor stimulative for the economy. If you're at neutral, you're not hitting the gas or the brakes, you're coasting. If you're above neutral, you're hitting the brakes. If you're below neutral, you're hitting the gas. And it's a very difficult concept to measure. It's an abstraction and it doesn't exist in the real world. I can tell you the interest rate on a Treasury bond. I can't go out and sort of find r-star. It has to be estimated, right? And so I tend to like some of the time series methods for estimating r-star. However, they take quite a while, I think, often to update and the world changes more quickly than they can arrive at new estimates in some cases. And so I like to sort of start with that and then sort of adjust it with salient things in the economy that I think are of first order importance that have changed. And so what I'll do is I'll sort of start with that and I'll think about something like, and I've talked about this a lot. Think about something like population growth, right? Population growth is something that I think is not controversial to think of it as affecting r-star. I think that's a very well accepted concept. It wasn't that long ago that we were all talking about Japanification of the whole world because converging fertility rates coming down and demographics and aging and was that going to lead to low interest rates everywhere, right? That conversation was very common pre-COVID. And I think those pathways are valid pathways. I don't think they ever went away, just other stuff happened in the meantime that we were paying attention to other stuff. But I think those economic mechanisms have always been valid and we just had the largest population growth shocks of our lifetimes in both directions in the last few years, right? We had a huge population growth spike and then a huge decline in population growth related to changing border policies in the last few years. And so it totally 180'd. And so the idea that that wouldn't sort of feed through into short-run neutral rates that had consequences for monetary policy is sort of strange to me. So I would tend to sort of think, okay, let's take some of these models that do a good job of estimating these things, but maybe they're a little bit slow to adjust to something like that and then adjust them based on some salient changes that I think will be relevant for it.

Yeah, I think those are great work. Yeah.

Sure. I mean, we may already be seeing it. The labor market is weakest for new entrants and re-entrants to the labor market. And those are areas that generative AI arguably is affecting. And by the way the fact that those labor market segments seem weak seems to me an argument against assuming that low payroll growth is a function of border policy. I think a lot of people like to dismiss low jobs numbers as a result of changing border policy as being a negative labor supply shock. If that were the case, then cohorts that were sharp substitutes, that were strong substitutes for immigrant labor would have the hottest labor markets in the country and they'd be experiencing rising wage growth. If you sort of hold demand constant and reduce supply, you get higher prices. And you don't see that in the data, especially in a period of high productivity growth, you would expect to see much stronger wage growth. And so to me, the labor supply story isn't really consistent with it. I want to say something else about AI. Which is that, one criticism that I've heard people make is that we keep getting these negative supply shocks and the Fed keeps asking people to look through the negative supply shocks. Look, oil absolutely is a negative supply shock. And as I explained before, it doesn't affect the economy on a timeline unless there's changes to inflation expectations or a wage-price spiral, which is not happening. It doesn't affect the economy in a timeline that monetary policy can respond to, but there also are positive supply shocks. And AI is a great example of a positive supply shock. AI allows people to do more with less, right? It boosts productivity. It reduces barriers to entry. It allows people to produce more with fewer inputs. That's a positive supply shock that really matters for economic growth, for inflation, for unemployment, and for monetary policy. And all of that is really something that's very important that I think we need to take into account. Another positive supply shock is the change in the regulatory environment. I gave a speech in January in Greece in which I looked at the modern literature, some of which is by your Hoover colleagues Patrick McLaughlin. I looked at the modern literature on trying to quantify the regulatory code. And there's people like Patrick and Joseph Kamenovitz who do very good work using modern AI and machine learning and quantitative methods to reduce the regulatory code to numbers that you can then study. And I use this literature and I calculated that the deregulatory shock that's been ongoing since last year would weigh on inflation by about half a point per year over the next two years. Now, there was a Federal Reserve research paper that was published a couple weeks ago by two Fed staff economists, Danilo Cascaldi-Garcia and Matteo Iacoviello who using an entirely different quantification method and an entirely different empirical method came up with similar estimates of the deregulatory shock we're living through and if you apply their model to the size of the deregulatory shock that they estimate it causes about a 30 basis point drag on inflation, reduction in inflation per year for the next few years. Right? So I estimated about a 50 basis point persistent drag. They estimated about a 30 basis point persistent drag. I think those two are within noise of each other. I wouldn't reject 30 basis points as being outside of the confidence band given the uncertainty in these things. But this is an example of a positive supply shock. Like AI is another example of a positive supply shock that I feel is underappreciated in all of the talk about negative supply shocks. Whereas oil is generally a one-off shock. Again, unless there's changes to inflation expectations, unless there's a wage-price spiral, neither of which is happening, both AI and deregulation are going to have persistent effects when you look at the way that these models work. And so, as a result, these are things that I think are going to be pushing out the supply side. And we all know there's supply and demand. And if you hit the gas on demand while you're holding supply constant, you get inflation. If you push out supply as well, you're not going to get inflation.

No. So, AI definitely pushes the neutral rate up. And so, I gave a speech on my view on the neutral rate in September. It was the first speech that I gave as a member of the Federal Reserve Board. And in that speech, I described a number of policy changes that I thought had pushed around the neutral rate. And a lot of them brought the neutral rate down. Things like population growth, things like reduced fiscal deficits due to tariff revenue. AI is something that pushes the neutral rate higher. Deregulation also pushes the neutral rate higher by improving productivity. Positive supply shocks will push the neutral rate higher because they improve the return on capital. Now in that paper I started at what I thought was a very high neutral rate and then I applied sort of changes from population growth and increased fiscal revenue, decreased national borrowing and then I came down to a low level. So I started probably at the top end of the range of my colleagues and then I ended up at the bottom end of the range of my colleagues but in neither case was I above them but I baked AI into my starting points or I tried to.

Sure. So look, in the longer run, we need to get our fiscal house in order. In the shorter run, I do think that tariffs have started raising revenue that changed some of the trajectories in the short to medium run. Now they don't, I don't see them solving the very long-term budget issues which of course matter for the interest rate market and for things that matter to monetary policy and r-star and the economy. But I think in the short term, in the medium term those dynamics have definitely changed. So if you expect about a point and a third of GDP of additional revenue from tariffs per year over the course of a decade I think it's a pretty powerful reduction in the deficit. Also, better productivity growth, better GDP growth also improves the deficit because revenues will grow faster than outlays. And so between the two of those, I think it's not far-fetched to think that the primary deficit can get better by a couple points of GDP, which of course again does not solve our fiscal problems on a multi-decade timeline, but it will ameliorate those problems over the course of coming years. So I do think that this is an area for important work. But I think things have gotten somewhat better in the recent past too. And I think that's starting to be evident in the data. And so if you look at the time period after tariffs were implemented, if you look at calendar Q2 through Q4 of 2025 versus calendar Q2 through Q4 of 2024, you see the deficit starting to come in. Now, not all of that is tariffs, not by any means, but it's come in by hundreds of billions of dollars. And so I think that is worth acknowledging.

Thanks so much for having me.