Michael S Barr: Efficient and effective central banking - beyond the balance sheet

Thank you for the opportunity to speak to you today.

There has been a lot of discussion of late about reducing the size of the balance sheet of the Federal Reserve to reduce our "footprint" in the financial system. I think it is important to frame the discussion, first by being clear about the nature of the problem to be solved and then weighing the tradeoffs of any remedies. I think shrinking the balance sheet is the wrong objective, and many of the proposals to meet this objective would undermine bank resilience, impede money market functioning, and, ultimately, threaten financial stability. Some would actually increase the Fed's footprint in financial markets.

That's because the Fed's footprint in the financial system consists not only of the duration, composition, and size of our balance sheet (which are distinct issues), but also our roles in promoting the safety and soundness of banks, running the backbone of the payment system, and supporting financial stability. It doesn't make sense to talk about "the Fed's footprint" without taking into account these key functions and the way they interact. Some of the prominent proposals to reduce the Fed's balance sheet would have perverse effects that would actually increase the Fed's footprint in the financial system. For example, some proposals would increase the frequency of Fed lending and transactions in markets, both to implement monetary policy on an ongoing basis and, in extremis, to engage in interventions to preserve financial stability.

Today I am going talk about what I see as efficient and effective central banking-central banking that holistically implements monetary policy, provides meaningful oversight of financial institutions, supports payment system functioning, and, in the Fed's case, also includes serving as the fiscal agent to the Treasury Department. We can't ignore any of these responsibilities, so when considering changes to our policies and practices, we need to consider the spillovers to our other duties and evaluate the tradeoffs. This integrated approach to central banking is essential to achieving the Fed's multiple objectives.