Cleveland Fed President Beth Hammack says the Federal Reserve faces deep uncertainty over how its huge balance sheet is affecting the economy, and she called the challenge of pinpointing when reserves move from abundant to scarce 'extremely difficult.' Hammack, speaking in remarks covered by CryptoBriefing, argued that the era of low interest rates may have distorted market benchmark expectations and that policymakers currently lack a clear model for judging how the size of the balance sheet influences borrowing costs and risk behavior. She supports reducing the balance sheet at a moderate pace, with reserves kept 'slightly above ample' — a level designed to avoid a repeat of September 2019, when depleted reserves sent overnight repo rates soaring. At the same time, she warned that too large a balance sheet carries costs: higher interest payments to banks, lower remittances to the Treasury, and the possibility that suppressed market volatility encourages excessive risk-taking.
Beth Hammack, president of the Federal Reserve Bank of Cleveland, said the Fed is navigating deep uncertainty about how its large balance sheet affects the economy. Pinpointing the moment when reserves shift from abundant to scarce is, in her words, "extremely difficult."
Hammack, in remarks reported by CryptoBriefing, argued that the low-rate era may have distorted market benchmark expectations. Policymakers, she said, lack a clear model for assessing how the size of the balance sheet influences borrowing costs and risk behavior.
She backs a measured pace of quantitative tightening, with reserves kept "slightly above ample" — a buffer intended to prevent a repeat of September 2019, when shortages of reserves pushed overnight repo rates sharply higher.
An oversized balance sheet is not without costs, she warned. It increases the interest the Fed pays to banks, trims the funds remitted to the Treasury, and may suppress market volatility, which could encourage excessive risk-taking.
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