And, of course, regulatory influences on banks’ behavior, my focus today, is just one of many factors that could affect policymakers’ decisions regarding the appropriate long-run size of the Fed’s balance sheet.7 In particular, in augmenting its Policy Normalization Principles and Plans, the FOMC stated in June 2017 that it “currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis” and went on to note that “the level will reflect the banking system’s demand for reserve balances and the Committee’s decisions about how to implement monetary policy most efficiently and effectively in the future.
"8 With that said, it is useful to begin by examining banks’ current reserve holdings. Figure 1 plots the aggregate level of reserve balances in the U.S. banking system, starting well before the financial crisis.