Fed's Balance Sheet Reduction Guide Challenges Conventional Views

On April 20, Jin10 reported that a research paper titled 'User Guide to Reducing the Federal Reserve's Balance Sheet' was recently published by Fed Governor Milan and three other economists. According to Jin10, the structure of this paper bears similarities to the previously discussed 'User Guide to Restructuring the Global Trade System.' The paper challenges the conventional view that the Federal Reserve faces difficulties in significantly reducing its balance sheet. It argues that reserve requirements are largely determined by the regulatory environment and suggests that adjustments to the regulatory framework, suppression of precautionary motives, and other sources of reserve demand could enable balance sheet reduction without causing unexpected market pressure. The potential reduction space, estimated using Monte Carlo simulations, ranges from $1.2 trillion to $2.1 trillion. The report suggests that the 'balance sheet reduction guide' has some practical feasibility, although certain options may be overly idealistic.