Revisiting the Outlook for the Fed's Balance Sheet

The report analyzes the Federal Reserve's balance sheet outlook, projecting that reserves will stabilize at 11% of bank assets with a $25bn monthly growth trend starting in 2027.

Key Takeaways

• 1.The selection of Kevin Warsh as the next Fed Chair has renewed focus on shrinking the balance sheet, but structural demand for reserves remains high.
• 2.Reserves are expected to stabilize around 11% of bank assets, requiring a return to a $25bn per month expansion pace by early 2027.
• 3.There is a high hurdle for meaningful balance sheet reduction due to the risks of overshooting and inducing funding market volatility.

Table of Contents

• Factors behind the growth and the evolution of reserve demand
• The balance sheet baseline and illustrative scenarios
• Routes to a smaller balance sheet
• Encourage banks to economize and redistribute reserves via higher rates
• Shift regulatory induced demand for reserves
• Proactively mitigate non-reserve liability volatility
• Downside risks, but a high hurdle to a meaningful outright reduction

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