Análise aprofundada do importante artigo do Federal Reserve sobre "redução de ativos": Quanto reduzir, como reduzir, qual será o impacto?

Taiwan Tuesday at 10 p.m., the U.S. Senate Banking Committee will hold a hearing on Kevin Woor’s nomination for Federal Reserve Chair. This is Woor’s first formal appearance at Capitol Hill to systematically articulate his monetary policy stance. Notably, Woor has long been critical of the Fed’s large balance sheet, and this hearing may serve as an important platform for him to express related views.

In fact, since the end of 2025, the direction of the Fed’s balance sheet has been a core issue closely watched by global financial markets. Against this backdrop, Fed Governor Stephen Milan, together with three Fed economists, recently released a working paper titled “A User’s Guide to Reducing the Federal Reserve’s Balance Sheet,” and on March 26, 2026, during a keynote speech at the Miami Economic Club, systematically explained the strategic logic and potential pathways for Fed balance sheet reduction.

The core value of this paper lies in challenging the market’s conventional understanding. Previously, the market generally believed that “the ceiling for Fed balance sheet reduction is when reserves are exhausted.” However, the paper points out that reserve demand can itself be shaped by policy—through a series of regulatory and operational adjustments, the Fed can significantly shrink its balance sheet while maintaining a “sufficient reserves” framework.

In response, CITIC Securities’ research team provided an in-depth interpretation. They judge that: relaxing the LCR standards, reforming SRP, and upgrading Fedwire are technically feasible options; but layered reserve requirements, reforming TGA and foreign reverse repo pools are more idealistic. Overall, the process of balance sheet reduction is unlikely to alter the underlying logic of global central banks’ gold purchases. CITIC Securities maintains its view that the Fed will cut interest rates by 25 basis points in the second half of this year.

Why Reduce the Balance Sheet: Milan’s List of Reasons

In his Miami speech, Milan straightforwardly presented multiple reasons for reducing the Fed’s balance sheet.

First, to reduce market distortions. The Fed’s large balance sheet exerts unnecessary interference in the capital markets, exacerbating disintermediation issues. Minimizing the Fed’s “footprint” in the market is a fundamental requirement to preserve market price discovery functions.

Second, to control financial risks. Large asset holdings imply greater exposure to market value losses and lead to increased volatility in remittances to the Treasury. Recently, the Fed has been under pressure from unrealized losses due to holding long-duration securities, which is an issue that can no longer be ignored.

Third, to safeguard monetary and fiscal boundaries. A huge balance sheet objectively allows the Fed to intervene in credit resource allocation, blurring the line between monetary and fiscal policy. Additionally, paying large interest on reserves has been viewed by some Congress members as a covert subsidy to financial institutions.

Fourth, to retain policy ammunition. If the next zero-lower bound crisis occurs, the Fed will need room to expand its balance sheet for easing. Shrinking the balance sheet now to a reasonable size preserves necessary space for future policy maneuvers.

Milan admits that the public generally believes “significant balance sheet reduction is impossible.” But his judgment is quite different: “Balance sheet reduction is a solvable challenge; those who outright deny it simply lack imagination.”

Key Diagnosis: Demand, Not Supply, Blocks Balance Sheet Reduction

To understand this discussion, first clarify a long-misinterpreted logical structure.

The traditional view holds that the constraint on Fed balance sheet reduction comes from “reserve supply hitting a steep demand curve”—once supply tightens to a critical point, the overnight rate will spiral out of control. Therefore, the Fed can only passively stop shrinking once reserves become “scarce.” The September 2019 “repo market shock” was a real-world illustration of this logic.

The breakthrough in the paper is shifting the perspective from “supply side” to “demand side.” It states that reserve demand is not an exogenous constraint naturally determined by payment settlement activities, but is artificially elevated by regulatory rules, supervisory practices, and the Fed’s own operational frameworks. Milan calls this phenomenon “regulatory dominance” over the Fed’s balance sheet.

Specifically, three mechanisms jointly push up reserve demand:

1. The interest rate spread makes reserves a “risk-free earning asset.” After the Fed started paying interest on reserves (IORB) in 2008, reserves transformed from mere settlement necessities into assets competing with Treasury bills. Historically, periods with IORB above the 1-month/3-month Treasury yields saw banks prefer to hold reserves for risk-adjusted returns.

2. Multiple liquidity regulation overlays create a “ratchet effect.” Rules like LCR, ILST, RLEN, NSFR, SLR intertwine, forming a “whack-a-mole” dilemma—changing one rule immediately triggers another constraint.

3. The long-standing “stigma” of discount window rates. High discount window rates, historical links to “problem banks,” and transparency/monitoring risks lead banks to hoard reserves rather than use policy tools during liquidity stress. This stigma also extends to standing repo facilities (SRP).

This diagnosis implies a fundamental policy path: no need to wait for reserves to become scarce again, but rather lower the “scarcity–adequacy” boundary, allowing the adequate reserve framework to operate normally at a smaller balance sheet.

How Much Can Be Reduced: Quantitative Estimate of $1.2 Trillion to $2.1 Trillion

Using the Fed’s H.4.1 report data as of March 11, 2026, total assets were about $6.646 trillion. The liability structure breakdown: reserves about $3.073 trillion, currency in circulation $2.39 trillion, the U.S. Treasury General Account (TGA) about $806 billion, and foreign reverse repo pool about $325 billion.

The paper estimates the impact of 15 policy options across two main directions, using a Monte Carlo aggregation under the OMB A-4 framework to account for correlations and substitutions. The confidence intervals are:

Median reserve demand reduction: between $825 billion and $1.75 trillion, approximately $1.287 trillion.
Total balance sheet reduction: between $1.15 trillion and $2.125 trillion, approximately $1.637 trillion.

Milan compares these ranges with historical reference points:

• 15% of GDP: the level of assets and liabilities after the first round of QE in 2009, when the banking system still functioned normally;
• 18% of GDP (2012 or 2019 levels): reflecting Basel reforms and Dodd-Frank requirements after clarity was achieved, representing the true liquidity needs of banks.

Currently, the Fed’s balance sheet is about 21% of GDP. Based on the median estimate in the paper, if reforms proceed smoothly, the balance sheet could fall back to levels close to 2012 or 2019. Reaching below 10% of GDP, as before the crisis, is deemed “unrealistic and unnecessary,” Milan states.

How to Reduce: “Menu-Style” Analysis of 15 Options

The paper categorizes the 15 policy tools into two groups, providing effect ranges and implementation assumptions for each.

First group: Lowering equilibrium reserve demand

(1) Supervisory reforms

• LCR reform (Liquidity Coverage Ratio): allows banks to include financing capacity from non-HQLA loans pledged at the discount window, with an upper limit. Estimated impact on reserve demand: $50 billion to $450 billion. Caution: if only LCR is changed, NSFR may immediately become a new binding constraint, requiring coordinated reforms.
• ILST and RLEN liquidity assumptions: if regulators approve discount window capacity and short-term liquidity sources, reforms could reduce reserve demand by $50 billion to $200 billion; extending the discount window’s available time could add another $0 to $100 billion.

(2) Supervisory approach

If banks hold excess reserves to appease examiners (i.e., T-bills and reserves are not “equal”), adjusting supervisory standards could reduce reserve demand by $25 billion to $50 billion. This reform requires no legal changes, only supervisory culture shifts, but is not easy to implement.

(3) Lower reserve holdings’ yield

Allow the effective federal funds rate (EFFR) to exceed IORB, breaking the current situation where EFFR is persistently below IORB. Using Lopez-Salido and Vissing-Jorgensen (2025) framework, an “EFFR–IORB = +2bp” scenario (close to September 2019 stress levels) could reduce reserve demand by $150 billion to $550 billion.

However, this path has clear costs: increased volatility in overnight and repo rates, and potential demand increase if markets hoard reserves preemptively. Supporting mechanisms like SRP and temporary open market operations (TOMO) are necessary.

(4) Enhancing alternative assets’ attractiveness

Upgrading Fedwire, improving Treasury market liquidity, promoting central clearing—aiming to make alternative assets more attractive to banks, closer to reserves. These measures also help private sector absorb securities released during balance sheet reduction.

(5) De-stigmatizing Fed’s liquidity tools

Removing concerns about using discount windows, standing repos, and intraday overdrafts reduces banks’ precautionary reserve demand. Requires transparency, pricing, and communication improvements from the Fed.

Second group: Directly reducing non-reserve liabilities

(1) TGA management recalibration

Reduce the Treasury’s cash buffer in the Fed account from “about 5 days’ operational funds” to “about 2 days,” with the excess transferred back to commercial banks (similar to historical TT&L arrangements). Estimated balance sheet reduction: $200 billion to $400 billion. Recognizes that deposit inflows from banks will increase reserve demand, so net effect is not one-to-one.

(2) Lower foreign reverse repo pool attractiveness

Reduce interest payments and set caps to encourage foreign central banks and sovereign funds to shift funds from the Fed’s reverse repo pool to U.S. Treasuries. Estimated impact: $0 to $100 billion, effect limited and dependent on external cooperation.

Woor’s Signal: From Technical Paper to Policy Expectation

Understanding this paper requires considering the Fed’s personnel background. Market widely expects Woor to succeed as Fed Chair. Woor has long criticized QE and the Fed’s balance sheet expansion policies, publicly advocating for balance sheet reduction.

This paper, led by Milan, is seen as a forward-looking signal of the future policy orientation in the “Woor era.” CITIC Securities’ research team notes that, given Woor’s stance and the potential space revealed by this paper, “the Woor era’s Fed may gradually explore restarting balance sheet reduction.”

However, both the paper and Milan’s speech emphasize that speed and pace are the most critical constraints in implementation. Milan explicitly states: “Once reform preparations start, under the usual pace of government procedures under the Administrative Procedure Act (APA), it could take over a year, or even several years.” He cites the SLR reform—going from temporary easing to formal regulation taking nearly six years.

This implies that the Fed will not immediately restart balance sheet reduction just because of this paper’s release. The more likely path is to start with less controversial, technically feasible options, while providing markets with forward guidance on new mechanisms.

CITIC Interpretation: Which Are Feasible, Which Are More Idealistic

From a practical perspective, CITIC Securities’ team systematically assesses the 15 options and concludes:

Feasible options:

• Relaxing LCR standards: a technical supervisory reform, with controllable variables and greater reform initiative;
• Reform of standing repo facilities (SRP): de-stigmatization work, not requiring legislative changes;
• Upgrading Fedwire and payment systems: infrastructure improvements with clear long-term direction;
• Adjusting ILST supervisory approach: some reforms can be achieved through supervisory culture shifts without legal amendments.

More radical or externally dependent options:

• Layered reserve interest payments: may trigger nonlinear bank responses, complex to operate;
• TGA management reform: involves coordination between Treasury and Fed, requiring political consensus;
• Lowering foreign reverse repo attractiveness: highly dependent on external institutions’ willingness, effect uncertain.

Overall, CITIC Securities considers this “a practical reform menu worth referencing,” but expects actual implementation to lag far behind the potential upper bounds depicted in the paper. It should be viewed as a directional guide rather than a near-term policy commitment.

Market Impact: Increased Volatility, No Change in Rate Cut Logic

Regarding bond markets, the Fed’s balance sheet reduction essentially reduces base money supply, increasing the scale of U.S. Treasuries that the private sector must absorb. CITIC Securities believes this will amplify market volatility and tail risks—though some regulatory easing (like SLR relief) can help expand dealer capacity.

Objectively, the paper opposes direct securities sales to accelerate reduction; instead, it favors letting maturing securities roll off naturally, while providing dealers and repo markets with higher absorption reserves. This limits short-term shocks.

CITIC Securities judges that U.S. Treasuries are currently more suitable for trading opportunities; short-term bonds are preferable to long-term ones.

For equities, balance sheet reduction exerts contractionary effects via monetary supply and portfolio effects, but can be hedged by lowering the federal funds rate. CITIC Securities believes that if reforms proceed, the rate path will adjust accordingly, but this is only loosely linked to current monetary policy pace. U.S. stocks may wait for pullback opportunities to find safer margins.

For gold, reforms are unlikely to change the strategic logic of central banks’ gold accumulation, which is driven more by geopolitical reshuffling and dollar reserve diversification. Gold remains a medium- to long-term allocation asset.

Milan explicitly states that the contractionary effects of balance sheet reduction can be hedged through rate cuts, and “balance sheet reduction may lead to a larger decline in the federal funds rate relative to baseline scenarios.” CITIC Securities expects U.S. CPI to fluctuate between 3.0% and 3.5% this year, maintaining the Fed’s rate cut of 25 basis points in the second half, with no direct link to balance sheet reforms.