Fed Governor Miran Warns Regulatory Dominance Distorts Monetary Policy, Calls for Banking Rule Overhaul

Federal Reserve Governor Stephen I. Miran delivered a pointed message in his remarks in Washington, D.C., warning that the size and structure of the Fed’s balance sheet are no longer driven purely by monetary policy objectives but increasingly by regulatory frameworks imposed on banks.

According to Miran, leverage ratios, liquidity rules, and supervisory preferences have elevated bank demand for reserves to a level that forces the Federal Open Market Committee (FOMC) to make balance sheet decisions based on regulation rather than macroeconomic conditions. This regulatory dominance risks distorting how monetary policy is implemented and constraining the Fed’s independence and operational flexibility.

Miran emphasized that the Fed’s balance sheet runoff—shrinking its securities portfolio—is ending not because of an immediate need to support markets but because regulatory burdens compel banks to hold high levels of reserves. As reserves dipped near the lower end of what the Fed considers ample, the FOMC opted to stop further reductions beginning December 1.

In a separate address to the Bank Policy Institute, Miran called for a full reset of post-crisis banking rules, arguing that overregulation has pushed traditional banking activity out of the regulated sector and altered credit provision. He highlighted that conflicting liquidity and leverage rules create contradictory incentives, where banks must hold reserves but are penalized for doing so, forcing the Fed to maintain a larger balance sheet to meet artificial regulatory demand.

Miran proposed reforms, including a more flexible regulatory environment, changes to the treatment of the Treasury General Account (TGA), and excluding Treasuries and reserves from leverage calculations to reduce market stress. He argued that right-sizing regulation is essential to allowing the Fed to shrink its balance sheet further, improve Treasury market functioning, and restore policy independence.

Market reactions followed reports of planned leverage ratio revisions by the Fed and other regulators, with Treasury bonds outperforming interest-rate swaps as traders anticipated banks increasing Treasury holdings.