Delivering remarks Wednesday morning at an event hosted by the Bank Policy Institute and Small Business and Entrepreneurship Council in Washington, D.C., Federal Reserve Governor Stephen Miran highlighted how “regulatory dominance” of the central bank’s balance sheet and resulting market distortions frame how he will vote on future policy decisions.

Utterly straight-faced, Miran told those assembled, “In any case, this is an exciting time to be a bank regulator, which is not something I imagined to be possible before arriving here.”

“For many years, financial regulation mostly moved in one direction, increasingly restricting the banking sector,” he said, describing the interplay of regulation, financial markets, the economy and monetary policy as “too often underappreciated.”

That underappreciation has created “adverse consequences and lots of head-scratching as to their causes,” Miran said, with rules implemented to promote financial stability “in some respects” constraining the Fed’s transmission of monetary policy.

Recent results of Miran’s reasoning are the formal dissents he registered at each of the Fed’s policy meetings in September and October. On each occasion the central bank’s rate-setting committee voted to lower its benchmark borrowing rate by 0.25%.

Calling for a 0.5% reduction at each meeting, Miran has been vocal about his stance that the neutral policy rate at which bank borrowing costs are neither accommodative nor restrictive to the overall economy should be much lower — demanding more dramatic reductions of the federal funds rate.

The emergence of stablecoins as a dollar-denominated savings vehicle has opened “previously untappable foreign savings to dollar securities,” he said, with industry projections for “very significant inflows” of global savings into U.S. capital markets necessitating a response concerning U.S. interest rate policy.

“If you have trillions of dollars of inflows into dollar-savings vehicles, it has implications for monetary policy” by depressing the neutral rate, said Miran. Failure by the Fed to respond with interest rate cuts, if those projections prove accurate, is to implicitly engage in a contractionary policy, he suggested.

The Fed’s rate-setting committee also voted in October to end its balance sheet runoff on Dec. 1, a policy move that Fed Chair Jerome Powell hinted at in a speech delivered during an October award luncheon hosted by the National Association of Business Economists.

In those October remarks, Powell admitted that pandemic-era balance sheet expansion, which included the purchase of trillions of dollars of agency mortgage-backed securities, “could have and perhaps should have” stopped sooner.

‘A smaller Federal Reserve footprint’

Miran said Wednesday that he supported the decision to end balance sheet runoff, noting he believes the Federal Reserve “should aim for the smallest footprint it can manage,” which means “limiting distortions to the provision of credit in the economy, for instance, through large-scale asset purchases.”

He said that markets should evolve away from distortions caused by “quirks in the regulatory system” and toward economic outcomes reflecting fundamentals between borrowers and lenders.

To that end, Miran views discussions about bank reserve balances and the composition of the Fed’s balance sheet as “downstream of the bank regulatory framework.” To debate the best implementation of monetary policy before settling the regulatory framework “is putting the cart before the horse.”

With the Federal Reserve actively pursuing deregulation, including reassessing bank leverage requirements, Miran believes “tailoring the regulatory system more aggressively” can help rectify market distortions that would necessarily change how Fed policymakers think about the impact of future policy shifts.

“Broadly speaking, I believe regulators went too far after the 2008 financial crisis, creating many rules that raised the cost of credit and limited its availability without reducing risk in a compensatory fashion,” Miran said.

He cited the migration of traditional banking activities away from the regulated banking sector as one impact of rising compliance cost burdens, as the regulated banking sector has pulled back from certain kinds of credit allocation and services.

Criticizing what he described as the inclination to overreact to market dysfunction, he added that the post-crisis regulatory regime has caused market distortions requiring higher levels of reserves in the system, increasing the Fed’s broader footprint in the market and inflating the neutral rate.

“While I have no bias against nonbank financial companies, credit allocation should be driven by market forces, not regulatory arbitrage,” he said.

He added that the costs and benefits of regulation on community banks “are rarely comparable” to those on systemically important banks, “heavily” impacting the credit available to local economies where community lenders are uniquely positioned.

He said regulations often help create economies of scale benefiting larger institutions that can more efficiently distribute fixed compliance costs over broader revenue bases.

A recent analysis from the Conference of State Bank Supervisors (CSBS), a national policy group comprised of top financial regulators from every state, reveals small banks and community banks bear a disproportionate regulatory cost burden compared to their big-bank counterparts.

“The results support the need for proportional regulation that is tailored according to size, business model, risk profile and complexity, as well as targeted compliance relief and incentives for technology adoption,” wrote Thomas Siems, chief economist for the CSBS, in a working paper published in July.

Miran believes getting “the regulations right” prior to further reductions in the Fed’s balance sheet will ensure that banks’ balance sheets “are flexible enough for an environment with a smaller Federal Reserve footprint.”

“If we go far enough with removing regulations,” said Miran, concluding his remarks exploring the overlap between regulatory policy and monetary policy, “we may be able to limit perceptions that the Fed is picking winners and losers through regulation, asset purchases and credit allocation decisions.”