Fed’s Barr warns against easing bank liquidity rules to shrink balance sheet

Federal Reserve Governor Michael Barr said May 14, 2026, that reducing bank liquidity requirements to shrink the Fed’s balance sheet would be a mistake that could weaken financial stability and increase reliance on Fed emergency facilities. Barr said the 2023 banking stresses showed liquidity rules should be strengthened, not loosened. He argued the size of the Fed’s balance sheet is the wrong measure of its market footprint, saying the focus should remain on effective monetary policy implementation and smooth market functioning. The Fed’s holdings peaked near $9 trillion in summer 2022 after pandemic-era Treasury and mortgage-bond purchases. Balance sheet runoff has since reduced holdings by more than $2 trillion, to about $6.7 trillion. Barr’s remarks come amid debate over whether future Fed leadership could pursue a smaller balance sheet and whether regulatory changes could allow banks to hold less liquid cash.