Payment Needs and the Size of the Federal Reserve’s Balance Sheet

Ricardo Reis

No 21417, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This short note explains the challenges with shrinking the Fed’s balance sheet. It argues that policies to reduce the balance sheet are synonymous with policies that reduce the demand for bank reserves. At the same time, controlling money market volatility while keeping the balance sheet as small as possible requires that the central bank commits to an elastic supply of reserves. Objections to having a standing repurchase facility open to banks that appeal to stigma ultimately refer to supervisory failures that can and should be corrected.

Date: 2026-04
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