Fed's Barr warns of tradeoffs in shrinking balance sheet

Federal Reserve Gov. Michael Barr cautioned against shrinking the central bank's balance sheet, stating it could lead to unintended consequences and increased market volatility. He emphasized that reducing reserves could undermine bank resilience and threaten financial stability, contrary to incoming Fed chair Kevin Warsh's priority to reduce the balance sheet. Barr argued that lower reserves might necessitate more frequent Fed interventions, ultimately increasing its footprint in financial markets. He concluded that the goal of shrinking the balance sheet is misguided if it compromises the banking system's resilience.