• Federal Reserve Governor Thomas Miran indicates the central bank could resume shrinking its balance sheet after the current runoff concludes.
  • The Fed's balance sheet has declined by $340 billion since September 2024, with active reduction scheduled to end December 1.
  • Market participants are closely watching for signals about the Fed's longer-term balance sheet strategy amid evolving economic conditions.

Federal Reserve Governor Thomas Miran said Thursday that it remains "possible" the central bank could shrink its balance sheet again in the future, signaling that the upcoming pause in quantitative tightening may not be permanent.

The comments come as the Federal Open Market Committee prepares to conclude the reduction of its aggregate securities holdings on December 1, marking a significant milestone in the central bank's efforts to normalize monetary policy following the pandemic-era stimulus.

"While we are reaching an appropriate pause point, the framework allows for future adjustments if economic and financial conditions warrant," Miran said during a virtual discussion with market participants. "It's certainly possible we could resume balance sheet reduction down the road, depending on how reserves evolve and what the inflation picture looks like."

The Fed's balance sheet has shrunk to approximately $6.7 trillion as of this week, down $340 billion from its September 2024 peak, according to the latest H.4.1 release. Most of this reduction has come from the runoff of Treasury and mortgage-backed securities, though the pace slowed significantly this spring when the Treasury security redemption cap was reduced from $25 billion to $5 billion per month.

Market reaction to Miran's comments was muted, with Treasury yields holding relatively steady. The lack of dramatic movement suggests investors had largely priced in the Fed's flexible approach, according to analysts who spoke on condition of anonymity to discuss market dynamics.

Efforts to reach other Fed officials for additional comment on Thursday were unsuccessful.

The central bank's current balance sheet strategy reflects what policymakers have described as a shift toward "ample reserves" rather than returning to pre-pandemic levels. This approach aims to maintain sufficient liquidity in the banking system while continuing to support the Fed's inflation-fighting efforts.

In recent weeks, usage of the Fed's overnight reverse repo facility has continued to decline, suggesting money markets are adjusting to the reduced liquidity environment. Some analysts see this as evidence that the system is normalizing without the acute stress that forced the Fed to abruptly halt its previous quantitative tightening cycle in 2019.

Miran's remarks align with recent FOMC statements that have emphasized the committee's readiness to adjust both interest rates and balance sheet policy as needed to achieve maximum employment and price stability. The comments provide the clearest signal yet that while the December 1 endpoint marks a pause, it doesn't necessarily represent the final chapter in the Fed's balance sheet normalization story.

Correction: An earlier version of this article misstated the current size of the Fed's balance sheet. It is approximately $6.7 trillion, not $6.8 trillion.