Odd Lots · Thursday, September 3, 2026
Daryl Duffy explained that the Federal Reserve is unlikely to significantly reduce its balance sheet by shrinking bank reserves. He attributes this to the current regulatory environment where the Fed pays interest on reserves, making them an attractive 'Swiss army knife' for banks to meet liquidity needs and payment services, a situation that developed after 2008.
“The banks were not in the least interested in holding reserves, because why would you hold reserves getting zero interest when you could invest the money in money markets and under a full market rate?”
“Today, in order to control inflation, the Fed is forced to pay an interest rate to banks that's roughly the market rate. And so if you ask a bank, why don't you give up some of those reserves? They might say, well, why?”
“so useful for meeting liquidity regulations. They pay a full market interest rate. They're perfect for payment services. What's not to like? It's the Swiss army knife of finance.”