A New York Federal Reserve official responsible for monetary policy implementation stated that the Fed's existing interest rate control toolkit is sufficient to handle a scenario of declining reserve demand, emphasizing the framework's strong track record across various economic and financial conditions.

Roberto Perli, manager of the New York Fed's System Open Market Account, spoke at a conference hosted by the Atlanta Fed on Tuesday. He noted that if changes in the financial system allow banks to hold fewer reserves, the Fed's current ample reserves implementation framework is fully capable of managing the Fed's balance sheet reduction.

He stated, "For any implementation framework, the key criterion is whether it can effectively control interest rates across a range of economic and financial conditions—on this measure, our framework has an excellent historical record."

Simultaneously, Perli indicated that the Fed would flexibly adjust the pace of Treasury bill purchases, depending on market conditions.

These remarks come as debate intensifies over the future path of the Fed's balance sheet. Kevin Warsh, who is set to become Fed Chair, has long criticized the Fed's large-scale bond purchases, arguing that the scale of the Fed's market intervention is excessive, distorts pricing, and advocates for reducing the overall size of the balance sheet.

Currently, the main concern regarding the Fed's balance sheet is that the existing toolkit relies heavily on the level of reserves, which objectively limits the scope for balance sheet reduction, potentially making it difficult to significantly reduce holdings while maintaining effective control over the federal funds rate.

**Balance Sheet Reduction Scope Depends on Whether Reserve Demand Can "Shift Left"**

Perli acknowledged that a decline in reserve demand would create conditions for further balance sheet reduction. He said, "There are many catalysts that could cause a leftward shift in reserve demand, but given the current discussion, a plausible possibility is a potential future adjustment to bank regulatory liquidity requirements."

This statement directly points to a view—if regulators ease liquidity rules, the amount of reserves banks need to hold would decrease accordingly, and the Fed could then further reduce its asset holdings.

The Fed's balance sheet expanded sharply during the COVID-19 pandemic, peaking at around $9 trillion in mid-2022, before gradually declining to the current $6.7 trillion. Kevin Warsh, set to take over as Fed Chair, believes this size is still too large and argues that reducing the balance sheet would create more room for the short-term interest rate target to move lower.

Fed insiders point out that providing reserves to the financial system itself carries no cost, and given that the current framework already achieves highly precise control over monetary policy execution, the size of the Fed's holdings is not a substantive issue.

**Treasury Bill Purchase Pace to Remain Flexible**

Regarding Treasury bill purchase operations, Perli stated that the Fed would flexibly adjust the pace of Reserve Management Purchases (RMP) based on market conditions. He explicitly said, "We stand ready to increase or decrease the pace of RMP purchases as needed."

The Fed initiated a Treasury bill purchase program late last year, aimed at rebuilding market liquidity after years of balance sheet reduction. Currently, the purchase size of this program has decreased from an initial $40 billion per month to the current $10 billion per month.

Perli stated that the future purchase pace would be determined by market conditions, meaning the Fed will not adopt a fixed operational path on this issue, but will retain the flexibility to adjust at any time.