Federal Reserve Board member Milan hawks, shrinking the balance sheet while de-stigmatizing, the U.S. dollar pricing mechanism faces a restructuring

**Huitong Finance APP News——**Federal Reserve Governor Stephen Milan spoke on Thursday (March 26) calling for the elimination of the “stigma” associated with repurchase operations and the discount window to enhance the effectiveness of these traditional liquidity tools during crises. He also elaborated on the long-term path for the Fed’s balance sheet reduction, pointing out that the current massive asset size has distorted the market and limited future policy space.

Eliminating the Stigma of Liquidity Tools

Milan emphasized that the Federal Reserve should actively work to eliminate the stigma surrounding repurchase operations and the discount window. These tools are meant to function as reliable last-resort lending mechanisms during financial stress, but due to the negative perceptions of using them, banks are often reluctant to borrow, significantly weakening their actual effectiveness.

He believes that by reducing stigma, banks can be encouraged to use these liquidity support tools more proactively when needed, thereby enhancing the resilience of the entire financial system and reserving more policy flexibility for the Fed in the next crisis.

Path for Balance Sheet Reduction

Milan pointed out that the reduction of the Fed’s balance sheet will be a long-term process that will take several years to complete. The extent and pace of the reduction are highly dependent on changes in the reserve demand of the banking system.

He clearly stated that there is a realistic path to reduce the Fed’s held assets by $1 trillion to $2 trillion. More proactive market intervention measures could also help achieve this goal. Reducing the balance sheet helps lessen the Fed’s excessive influence on financial markets and provides more policy space for decision-makers when future crises occur.

Negative Impact of a Large Balance Sheet

Milan bluntly stated that the large balance sheet of the Federal Reserve has distorted financial markets and created problems for the Fed itself. This distortion not only affects the market price discovery mechanism but also limits the Fed’s policy flexibility in future economic cycles.

He believes that through an orderly reduction of asset size, the Fed can gradually restore a more normal monetary policy transmission mechanism, preparing for the next potential crisis.

Analysis of the Dollar’s Impact

Milan’s remarks signal that the Fed hopes to strengthen the robustness of its policy framework and reserve space for the future by enhancing the credibility of liquidity tools, clarifying the long-term balance sheet reduction path, and emphasizing the reduction of market distortions.

For the dollar, this will help stabilize market expectations for liquidity management in the short term, enhance the pricing efficiency of dollar assets in the medium term, and provide structural support for the dollar. Investors also need to pay attention to the fundamentals of the U.S. economy, fiscal discipline, and the credibility of Fed policies. On Friday during the Asia session, the dollar index fluctuated narrowly around 99.90.

（Dollar Index Daily Chart, Source: Easy Forex）

The probability of the Fed keeping rates unchanged in April is 93.8%, with a slight rise in rate hike expectations

According to the latest data from CME’s “Fed Watch,” the market expects a 93.8% probability that the Fed will keep interest rates unchanged at the April meeting, while the probability of a 25 basis point rate hike has dropped to 6.2%. Compared to the previous day, rate hike expectations have risen slightly.

For the June meeting, the cumulative probability of a 25 basis point rate hike is 19.9%, the cumulative probability of a 50 basis point rate hike is 1.0%, and the probability of keeping rates unchanged is 79.2%.

Recently, the situation in the Middle East has remained tense, but the U.S. side claims that negotiations are still ongoing, while Iran has stated that it is still reviewing the 15-point ceasefire proposal. Oil prices have fluctuated more, and the market’s pricing of the Fed’s policy path has subsequently adjusted. Attention should be paid to the evolution of the situation and key economic data.

Market Outlook and Risks

In the short term, Milan’s statements provide the market with a clear signal of the Fed’s long-term asset management direction, helping to stabilize expectations for liquidity tools. In the long term, the process of balance sheet reduction will gradually unfold, but its pace and effects will heavily depend on changes in bank reserve demand and the overall economic environment.

Investors need to closely monitor subsequent adjustments to the Fed’s liquidity rules, the release of balance sheet data, and potential market intervention measures. Any signals of accelerated reduction could impact long-term interest rate levels and financial market liquidity.

As of 9:38 Beijing time, the dollar index is currently reported at 99.83.

(Contributor: Wang Zhiqiang HF013)

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