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Dallas Fed President Lorie Logan just co-authored a paper that, in central banking terms, qualifies as a bombshell. The core argument: if regulators fix the way banks think about liquidity requirements, the Federal Reserve could meaningfully shrink its balance sheet from its current $6.7 trillion perch.
What Logan is actually proposing
Logan, alongside co-author Sam Schulhofer-Wohl, published the paper on April 2, 2026. It zeroes in on one central problem: banks are hoarding reserves at the Fed not because they need to, but because the regulatory framework incentivizes them to.
Right now, banks hold roughly $3 trillion in reserves at the Fed. That’s a massive chunk of the $6.7 trillion balance sheet, which also includes about $2.4 trillion in currency in circulation and more than $200 billion in other liabilities.
Banks park so much cash at the Fed partly because borrowing from Fed liquidity facilities carries a stigma. If a bank taps the discount window, the market reads it as a distress signal, even when it’s not. So banks over-prepare by sitting on enormous reserve piles instead.
Logan’s paper argues that reducing this stigma, and refining the broader regulatory liquidity regime, would let banks hold fewer precautionary reserves. That, in turn, would allow the Fed to operate with a smaller balance sheet while still maintaining its ample-reserves framework.
The balance sheet runoff story so far
The Fed has been in balance sheet runoff mode since June 2022, gradually letting its holdings shrink after the pandemic-era expansion pushed the balance sheet to unprecedented levels. That process has included slowdowns noted through 2025, as policymakers tried to avoid draining too much liquidity from the system too fast.
The Fed has operated under an ample-reserves framework since 2019, meaning it manages interest rates primarily through administered rates like the interest on reserve balances, known as IORB. Logan’s proposal isn’t about abandoning this framework. She’s arguing the opposite: that the ample-reserves regime can work more efficiently if regulatory changes reduce the structural demand for reserves. The paper explicitly notes that this path would be more cost-effective than switching to a scarce-reserves regime, which would require fundamentally different plumbing for monetary policy.
Why crypto markets should pay attention
When the Fed’s balance sheet expands, it typically injects reserves into the banking system. Bitcoin’s biggest rallies have coincided with periods of aggressive Fed balance sheet expansion, and its most painful drawdowns have aligned with tightening cycles.
The paper itself acknowledges that quantifying direct market impacts requires further empirical research, because banks may not reduce their reserve holdings as quickly or predictably as models suggest.
The practical timeline for any of this is uncertain. Regulatory changes of this magnitude typically take years to design, propose, comment on, and implement. But the fact that a sitting Fed president is publicly making the case for this approach signals that the conversation has moved beyond academic theorizing.
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