Logan's Balance Sheet Options: A Flow-Driven Analysis

The Federal Reserve's balance sheet now stands at roughly $6.5 trillion, a level it reached after concluding its quantitative tightening (QT) program on December 1, 2025. This marks a significant normalization from its pandemic-era peak, though it remains well above pre-crisis levels. The central bank has shifted to an ample-reserves regime, meaning its primary tool for managing short-term rates is the Interest on Reserve Balances (IORB), which sets the floor for money market rates.

With QT complete, the focus has moved to the mechanics of daily liquidity management. The Reverse Repo (RRP) facility has drained to near zero, indicating that non-bank financial institutions have little demand for safe, liquid reserves at the Fed's offered rate. This low demand suggests that the banking system itself is holding ample reserves, which the Fed now manages through targeted purchases to maintain the desired level of liquidity.

The bottom line is a system in steady-state. The Fed's massive balance sheet is no longer shrinking, and the IORB rate is the dominant lever for policy. The near-zero RRP usage confirms that the ample-reserves framework is functioning as designed, with liquidity flowing through the banking system rather than piling up at the central bank.

The Demand-Side Challenge

A Brookings paper argues that shrinking the Fed's balance sheet requires actively reducing banks' demand for reserves to avoid market disruptions. The paper's author, Stanford's Darrell Duffie, notes that a significant reduction in the balance sheet would need a corresponding drop in reserve balances, currently totaling about $3 trillion. Without managing this demand, the Fed risks "blowing up money markets," a scenario no one wants.

The Fed's current ample-reserves regime, established in 2019, ensures financial stability but maintains a high baseline level of reserves. As Dallas Fed President Lorie K. Logan stated, this framework provides "ample benefits for financial stability." The system works by paying banks interest on their deposits at the Fed (IORB), which sets the floor for money market rates. This policy has been effective, but it locks in a large, permanent level of reserves.

Recent volatility in the repo market highlights the fragility of this setup. The system's stability depends on the Fed's ability to manage liquidity precisely, but it operates with a high degree of opacity. The need for a clearer, more transparent policy framework is becoming urgent as the Fed navigates this complex, high-reserve equilibrium.

Logan's Framework Options: A Flow-Based Comparison

Dallas Fed President Lorie K. Logan has laid out a clear preference for a single market rate as the Fed's new benchmark. She favors a rate like the Tri-Party General Collateral Rate (TGCR) over administered rates (like IORB) or a basket of rates. Her reasoning is straightforward: administered rates are simply Fed-determined levels that don't capture true market dynamics, while a basket of rates complicates communication and obscures which rate is most relevant.

The key advantage of a single market rate is its direct link to observable, high-volume trading flows. TGCR, for instance, is the rate that money market funds earn on cash and the funding cost for large broker/dealers. This market has high volumes and a wide set of participants, creating competitive, two-sided negotiations. By contrast, SOFR includes an embedded market premium that can distort the true cost of borrowing in a competitive market.

Choosing TGCR would directly tie the Fed's target to the actual cost of secured overnight funding. This alignment is critical as the Fed navigates balance sheet normalization. With the RRP facility usage now below $100 billion, the system is shifting away from abundant reserves. A target rate that reflects this evolving repo market reality gives the Fed better visibility into front-end pressures and a more effective tool for managing the transition.