Macro Musings with David Beckworth Bill Nelson on the Future of the Fed's Balance Sheet
Mar 23, 2026
Bill Nelson, chief research officer and economist at the Bank Policy Institute and former Fed monetary official, joins to unpack the Fed's balance sheet future. He traces QE's ratchet effect on reserves. He discusses liquidity rules, supervisory interactions, concrete ways to shrink the Fed footprint, neutralizing TGA swings, and the Fed's profitability and interest-rate risks.
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Treasurer Chose To Keep Extra Cash Instead Of Explaining Cuts
- A bank treasurer told Nelson that when IORB was above the repo rate in 2016 they held two days of cash but chose to keep five days once norms changed.
- That treasurer feared having the hard conversation with examiners about reducing cash, illustrating institutional inertia.
Count Discount Window Capacity In Liquidity Rules
- Reform liquidity rules to recognize discount window capacity so banks can count borrowing capacity in liquidity metrics.
- That reduces forced holdings of liquid securities and frees balance sheet space for lending to households and businesses.
Normalizing The Discount Window Frees Up Lending
- Making the discount window business-as-usual reduces stigma, improves accuracy of liquidity assessments, and allows the Fed to operate with fewer reserves.
- Most collateral pledged to the window are loans, so banks could pledge productive assets instead of hoarding securities.