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.
The composition of those assets should worry every Fed official. Roughly $2.3 trillion sits in long-dated agency mortgage-backed securities (MBS), creating a maturity mismatch as the Fed now pays more on overnight reserves than it earns on those fixed-rate bonds—an equation that has already produced net operating losses. He urged a steady draw-down and a “shift toward more Treasury bills,” better matching short-term liabilities with short-term assets. Congress authorized paying interest on reserves in 2008; Waller insists this merely passes Treasury payments through the Fed to banks, sparing taxpayers new expense. Critics of all stripes, however, note that every dollar of interest still originates with federal borrowing.
“I agree that the balance sheet needs to shrink but, as I will show, not by as much as some believe it should,” Waller concluded. Whether the Fed can thread that needle without re-inflating asset bubbles—or testing yet another inflation surprise—remains the trillion-dollar question, and one reason gold bugs continue to keep their powder dry.
