Darrell Duffie, the Adams Distinguished Professor of Management and Finance at Stanford Graduate School of Business, joins Bloomberg Intelligence’s Ira Jersey on this Macro Matters edition of the FICC Focus podcast to discuss how much the Federal Reserve can realistically shrink its balance sheet under Chair Kevin Warsh. Duffie argues that the real constraint isn’t on the asset side, but on the liability side of the Fed’s balance sheet, especially reserve balances, paper currency and the Treasury General Account. The two examine how payment-system needs, liquidity regulations and banks’ operational demand for reserves limit how far the Fed can go and why changes to those frameworks would be necessary for any meaningful reduction in balance-sheet size. They also discuss whether the Fed should rely more on traditional temporary open-market operations, the case for shifting the asset mix toward Treasury bills and away from mortgage-backed securities, and how intraday overdrafts or liquidity-saving mechanisms could reduce reserve demand over time. The episode closes with a discussion of stablecoins, why they may increase demand for reserves at the margin and why Duffie believes they are unlikely to transform the domestic payments system anytime soon.

The Macro Matters podcast is part of BI’s FICC Focus series.