Beyond the Balance Sheet: How Bad Are Things at the Fed?

They are telling us destruction lies ahead. We should believe them.

Last week, Governor Michael S. Barr delivered a candid admission in his speech, Efficient and Effective Central Banking: Beyond the Balance Sheet. He sugarcoats nothing:

I think shrinking the balance sheet is the wrong objective, and many of the proposals to meet this objective would undermine bank resilience, impede money market functioning, and, ultimately, threaten financial stability.

The gravity of this cannot be overstated. Since December 2025, the Fed abandoned Quantitative Tightening (QT). They replaced it with Reserve Management Purchases (RMPs), buying $40 billion a month in Treasury bills ($193 billion since the start of RMPs).

The reason? Bank reserves. In March 2020, the Fed instituted a 0% reserve requirement policy. This ushered in an unfathomable monetary era where banks are no longer required to keep even one cent of physical cash against their lending. Yet, the Fed simultaneously created trillions of dollars in digital reserves and began paying banks to hold this money for them.

In 2025 the Fed paid $167 billion directly to banks ($147 billion for IORB, $20 billion for Repo), for the sole purpose of not lending to the public. Currently, the interest on reserve balances (IORB) stands at 3.65% on a $3.0 trillion balance.

This uneconomical policy severely broke the pricing mechanism. Now, central planners claim this dependency is a virtue. Barr cites Jerome Powell to cement the narrative:

Reserves are the safest and most liquid asset in the financial system, and only the Fed can create them. The adequate provision of reserves is essential to the safety and soundness of our banking system…

The moral hazard is profound, supported by the most glorious bit of Fedspeak I’ve ever seen:

Furthermore, creating reserves is costless to the Fed. The Fed pays interest on reserves but also receives interest on the other side of the balance sheet, which is largely in the form of Treasury securities. All the Fed’s excess earnings go back to the taxpayer.

He’s “right.” Creating trillions of dollars on a computer to hand to banks so they can earn risk-free income comes at no cost to the Fed. But the real cost is borne by society through monetary expansion and currency debasement; both often touted as virtues.

The lie works through omission. With interest rates this high, and an IORB that moves lockstep with the federal funds rate, the Fed has been losing money for quite some time.

They call their cumulative loss a “deferred asset,” which currently stands at a $241 billion. But here’s the kicker: the cumulative dividend paid to the Fed’s stockholders is legally protected. Until the Fed miraculously erases that $241 billion deficit, and only after paying off their stockholders, not a single penny of central bank revenue will go back to the U.S. Treasury.

Barr reiterates his lie, or willful ignorance:

Moreover, as I noted, there is no net cost to providing reserves, and making a free good scarce makes little economic sense.

Austrians understand that capital goods cannot be typed into existence. Labor, time, and the choice to defer consumption are the only things that give birth to real resource accumulation, tools, and factories. Growth only happens through the buildup of these physical capital goods.

In short, a nation cannot print its way to prosperity. If that were the case, we all should have been rich by now.

The Fed can print trillions of dollars, but it cannot manufacture a single brick or mortar. Central bank credit is not a free good; it is a market distortion that subverts the price mechanism and eventually leads to the Crack-up Boom.

The conclusion says it all:

In sum, shrinking the Fed’s balance sheet is the wrong goal, and reducing the resilience of the banking system is the wrong means.

With a $40 trillion debt on the horizon, rising interest rates and cost of living, a stock market that can only go up, and a Fed’s balance sheet that can never go down, the only thing certain is what comes next. The future is fixed, with economic destruction waiting ahead; none of which could have been made possible without the vision of a central planning committee.