Federal Reserve's Logan: Balance sheet can be reduced by changing regulatory rules.

Dallas Federal Reserve President Logan outlined the path and options for the Fed to shrink its balance sheet on Thursday, noting that the current system is functioning well and benefits overall financial stability. Logan stated that the Fed's current system for managing financial liquidity is designed to provide "ample" levels of reserves, and that the system is "efficient and effective." However, there are several ways to help reduce the Fed's holdings under the current system, many of which involve rules governing financial institutions' management of cash reserves. Recent internal and external research by the Fed indicates that by adjusting regulations to encourage banks to hold lower levels of reserves, the Fed could further shrink its balance sheet under the current system. Logan agreed, stating that the Fed is currently working to make reserve management "more efficient" during periods of stress. She also stated that some liquidity rules, while increasing reserves, have not improved safety because banks are reluctant to use these reserves during crises. "This is an inefficient use of the Fed's balance sheet, and we can completely avoid this," she said. (Jinshi)