Fed's Waller: No Need to Slow Balance Sheet Drawdown

Federal Reserve Governor Christopher Waller has made it clear that the current pace of balance sheet drawdown is appropriate, despite the ongoing economic uncertainties and the Trump administration's tariff policies. Waller's stance, articulated during the most recent Federal Open Market Committee (FOMC) meeting, underscores the Fed's commitment to normalizing monetary policy and reducing excess reserves in the banking system.

Waller's assessment is based on several key indicators. Reserve balances, which currently stand at over $3 trillion, are seen as abundant. This level of reserves suggests that there is still significant excess liquidity in the financial system, supporting the continued pace of balance sheet reduction. Waller noted, "In my view, we are not there yet because reserve balances stand at over $3 trillion and this level is abundant." This perspective aligns with the Fed's historical approach to normalizing monetary policy, which has been ongoing since 2022.



Moreover, Waller emphasized that there is no evidence from money market indicators or his conversations with industry experts that the banking system is approaching an ample level of reserves. This indicates that the current pace of drawdown is not causing undue stress on the financial system and that there is still room for further reduction in the Fed's balance sheet.

The decision to continue the current pace of balance sheet drawdown has several implications for the broader financial markets. Firstly, it could lead to a reduction in liquidity, potentially tightening financial conditions and making it more challenging for banks to lend and for businesses to access credit. This is particularly relevant given the Trump administration's tariff policies, which have introduced significant uncertainty into the economic outlook.

Secondly, the continued drawdown could impact money market conditions. The Fed's balance sheet reduction has been designed to strip liquidity from the financial system, which was added during the COVID-19 pandemic. As of March 2025, the Fed has shed just over $2 trillion from its balance sheet peak of $9 trillion. However, the ongoing impasse over lifting the government's borrowing limit and the Trump administration's tariff policies add layers of complexity.

Thirdly, the decision to continue the current pace of drawdown could influence market sentiment and investor behavior. The Fed's actions are closely watched by market participants, and any perceived shift in policy can have significant implications. As Emily Roland, Co-Chief Investment Strategist at John Hancock Investment Management, observed, "There is a whiff of stagflation to this. You're seeing the Fed revising down their estimates for growth and revising up modestly their expectations for inflation." This suggests that investors are already factoring in the potential for slower economic growth and higher inflation, which could be exacerbated by the Fed's continued balance sheet reduction.

Lastly, the decision to continue the current pace of drawdown could have implications for the Treasury market. The Fed is seeking to take out enough liquidity to allow it to keep control of its interest rate target and to allow for normal money market volatility. However, the ongoing tariff policies and the debt ceiling impasse could complicate the Fed's ability to manage liquidity effectively.

In summary, the Federal Reserve's decision to continue the current pace of balance sheet drawdown, as supported by Federal Reserve Governor Christopher Waller, could lead to reduced liquidity, impact money market conditions, influence market sentiment, and have implications for the Treasury market. These effects are particularly relevant in the context of the ongoing economic uncertainties and the Trump administration's tariff policies. Waller's stance reflects the Fed's commitment to normalizing monetary policy and reducing excess reserves, even as it navigates a complex and uncertain economic landscape.