Stephen Miran on Regulatory Dominance, Shrinking the Fed's Balance Sheet, and the Return of Monetarism

Episode Summary

Executive Summary: Steve Moran discusses his experience at the CEA and Fed, then lays out why he favors shrinking the Fed’s balance sheet: it distorts markets, blurs fiscal-monetary lines, politicizes credit allocation, and raises Fed loss/independence risks. He also argues monetarism remains useful when money is measured with Divisia aggregates, which can better track inflation pressure and serve as a policy cross-check.

Main Topics: White House and Fed behind-the-scenes roles (Priority: 3/5): Moran explains how the CEA advises on policy across a wide range of issues, while the NEC coordinates implementation across agencies. He also describes how Fed governors interact in the Martin Building and the constraints of the Sunshine Act. Why the Fed should shrink its balance sheet (Priority: 5/5): Moran argues that a smaller balance sheet is preferable because it minimizes distortions, preserves market allocation, reduces fiscal and political entanglement, and protects the Fed from large unrealized losses and volatile remittances. Regulatory dominance and reserve demand (Priority: 5/5): He contends that post-crisis liquidity regulations and stigma around Fed facilities cause banks to hold more reserves than needed. Reducing this demand is the key to shrinking the balance sheet while staying in an ample-reserves framework. Policy tools to reduce the balance sheet (Priority: 5/5): The discussion covers a menu of tools: incorporating regulatory liquidity requirements with discount-window collateral, broadening FEMA access, lowering stigma at the discount window, using standing repo more effectively, and considering reserve remuneration and leverage-rule adjustments. Monetarism and Divisia money (Priority: 4/5): Moran, Roubini, and Ireland argue that money still matters if measured properly. Divisia aggregates weight monetary components by liquidity services, yielding more stable velocity and better signals for nominal GDP and inflation than simple-sum measures. Future of Fed operating frameworks (Priority: 4/5): The conversation situates the Fed within a broader international shift toward smaller-balance-sheet, demand-driven operating frameworks and notes growing openness across central banks to rethink reserve demand and liquidity backstops.

Key Arguments: A smaller Fed balance sheet better aligns with standard economics because absent a market failure, government intervention should be limited. Large-scale asset purchases disintermediate funding markets and shift credit allocation from private markets to the government, often less efficiently. QE blurs monetary and fiscal policy by influencing the maturity structure of public debt and thus weakens Fed independence. Buying mortgage-backed securities can channel disproportionate credit to housing, creating long-lasting distortions and political backlash. A large balance sheet exposes the Fed to losses, deferred assets, and volatile remittances that can affect Treasury borrowing and institutional credibility. Banks hold excess reserves largely because regulations and facility stigma make liquidity backstops unattractive; reducing reserve demand is the most direct way to shrink the balance sheet. Going beyond ample reserves to scarce reserves is possible, but it would require accepting more plumbing volatility. Divisia aggregates are superior to simple-sum aggregates because they account for differences between transactions money and store-of-value assets. Money growth measured correctly can have useful forecasting content and should be used as a cross-check, not a standalone replacement, for other policy tools. The Fed should pay attention to money aggregates because the Federal Reserve Act explicitly refers to credit and monetary aggregates.

Data Points: Fed balance sheet size: about $6.7 trillion - Current approximate size cited during the discussion Fed balance sheet share of GDP: about 20% of GDP - Current size relative to the economy Possible balance sheet reduction: $1 to $2 trillion - Estimated reduction achievable while staying in an ample-reserves framework if reserve demand is reduced Reserve holdings: a little more than $3 trillion - Approximate amount of reserves on the Fed’s balance sheet Pre-GFC reserves: about $50 billion - Illustrative level of reserves in the scarce-reserves era before the financial crisis Pre-GFC balance sheet: about $800 billion - Balance sheet size associated with the earlier scarce-reserves regime Deferred asset position: exceeded $1 trillion - Fed losses discussed in the post-pandemic period Housing prices: 20% year-over-year - Moran cites this to argue the Fed still bought mortgages during a period of strong home-price inflation Paper publication timing: March 2026 - Prospects for Shrinking the Fed’s Balance Sheet speech and companion research paper timeframe Earlier speech timing: November 2025 - Regulatory Dominance of the Federal Reserve’s Balance Sheet speech timeframe Podcast return timing: September 2026 - Host notes the episode comes out roughly two years after Moran’s prior appearance Number of coauthors on balance-sheet paper: 3 - Alyssa Anderson, Alessandra Barberina, and Anthony Dierks Number of balance-sheet menu items: 15 items plus 11A and 11B - The paper’s policy menu enumerates multiple reform options Number of central-bank facilities mentioned implicitly: multiple (discount window, standing repo, FEMA, etc.) - Used as part of the policy toolbox to reduce reserve demand

Pivotal Quotes: "the paper, as you know, and I like to give credit where it's due. ... is neutral. It doesn't take a view about what good policy is." — Steve Moran: Describing the companion balance-sheet paper as a menu of tools rather than an advocacy document "we're sort of stuck, I think, in a bit of a rut with a big balance sheet." — Steve Moran: Explaining why he became interested in balance-sheet reduction "You don't have that in terms of the balance sheet, right? Not really a market failure that would justify a big government intervention." — Steve Moran: Core economic argument for a smaller Fed footprint

Implications: The conversation signals a policy shift toward shrinking the Fed’s footprint, normalizing backstops like the discount window, and using better money metrics. If adopted, these ideas could reduce distortions, improve Fed independence, and sharpen inflation forecasting.