Fed Governor Waller Defends $6.7 Trillion Balance Sheet

Federal Reserve Governor Christopher J. Waller used a Dallas Fed podium Thursday to peel back the curtain on the central bank’s swollen balance sheet—and to argue that a slim-down is overdue but shouldn’t be draconian. Since 2007, Fed assets have ballooned from $870 billion (about 6 percent of U.S. GDP) to roughly $6.7 trillion, even after coming off a pandemic-era peak near $9 trillion. Waller’s remarks arrive as investors watch a fresh record in gold, which briefly pierced $3,316 per ounce on Wednesday, suggesting that some market participants doubt Washington’s grip on inflation.

By Waller’s math, the Fed’s ledger would be nearer $1.7 trillion today if it had merely kept pace with nominal GDP (gross domestic product) over the past 18 years. Instead, two liabilities largely “not under the Fed’s control”—currency in circulation and the Treasury General Account (TGA)—now total about $3 trillion, nearly half of all Fed liabilities. Currency alone has nearly tripled to $2.3 trillion since 2007, reaching 8 percent of GDP, while the TGA swung from a tax-season peak of $960 billion to just $325 billion during the recent debt-ceiling drama. That volatility underscores how fiscal policy, not the Fed, dictates large slices of the balance sheet.

Reserve balances held by commercial banks stand at roughly $3.4 trillion, or 11 percent of GDP, still comfortably above Waller’s “ample” threshold of $2.7 trillion (9 percent of GDP). He reminded listeners that money-market turmoil erupted in September 2019 when reserves dipped below 7 percent of GDP, implying that the Fed must keep a safety buffer. Even so, combining his preferred $2.7 trillion in reserves with existing currency and an average TGA of $780 billion yields a “minimal ample-reserves” balance sheet of about $5.8 trillion—triple the 2007 size and a hefty 19 percent of today’s GDP.…