Chair Kevin Warsh arrived at the Federal Reserve last month with an agenda for change in the central bank’s communications. Talk less. Replace granular forward guidance with a durable policy framework. And, according to news reports, scale back or even scrap the dot plot – the policy-rate projections in the quarterly Summary of Economic Projections (SEP), which also collects FOMC participants’ forecasts for inflation, unemployment, and growth.

Chair Warsh’s diagnosis of the Fed’s shortcomings raises a question: if the Fed needs a new, clear policy framework, how does a prescription for saying less make sense? In our view, transparency and communication are not the same thing. Transparency is how much the Fed discloses; communication is whether what it discloses conveys an understanding of its reaction function — the relationship between economic conditions and the path of the policy rate. The two can move in opposite directions — if the extra material is noise, a central bank can disclose more yet communicate less. In that sense, Warsh is right that more talk is not the goal in itself.

But the best remedy for an imperfect policy framework is clearer communication of the actual reaction function. That requires disclosing more of what matters and less of what does not, allowing Congress and the public to hold the Fed accountable for its legal mandate.

Money is a confidence trick. When you tap a card, swipe a phone, or send a wire, you move a claim on a commercial bank. You expect others to accept that claim at par — you send a dollar, euro, pound, or yuan, and they receive one. The claim settles and life goes on.

This apparent simplicity conceals an elaborate architecture. Commercial bank deposits circulate at par with central bank money (reserve liabilities) because a complex legal and institutional framework makes the parity credible. Prudential regulation constrains bank risk-taking. Supervision enforces the constraints. Deposit insurance reduces the incentive to run (or to panic). The lender of last resort keeps solvent banks liquid when private funding evaporates. Settlement in central bank money anchors the payment system. Each element reinforces the others. Start stripping them away and private liabilities like bank deposits will stop functioning as money.

Stablecoin advocates ignore these essential foundations. They point to asset backing — in some cases, with quality determined by legislation like the GENIUS Act — and a programmable ledger, and stop there. That is not enough. General acceptance of private money — digital or otherwise — depends on functions that only a central bank can provide. Tokenized deposits inherit this institutional support; stablecoins do not. That is why tokenized deposits will likely dominate stablecoins outside the crypto ecosystem (see here).

The history of payments is an arms race that pits law enforcement against criminals, with criminals typically maintaining an edge. The newest technology is crypto and stablecoins. Milton Friedman saw them coming. Nearly a decade before Bitcoin launched, he described the technology that stablecoins have become: e-cash that is a digital peer-to-peer bearer instrument. He knew gangsters would make it their own, and they have.

Friedman's observation has a counterpart in an older principle about money. Gresham's Law — an observation associated with the Elizabethan financier Sir Thomas Gresham and later formalized by economists — holds that “bad money” drives out “good money.” In the era of metallic coinage, the rule was simple: spend the lighter coin, keep the heavier.

In this post, we argue that a modified version of Gresham’s Law applies to stablecoins. Stablecoins are private digital tokens that promise to maintain a fixed value — typically one U.S. dollar each — backed by reserve assets whose composition varies by issuer. Users who value anonymity gravitate toward what Gresham might have called the bad money: the coin with weaker oversight that makes identification easier to avoid.

Put differently: in stablecoins, as in metallic coinage, bad money drives out good — where “bad” means less transparent and less certain in value.

We authored this post jointly with our friend and colleague, Professor Jeremy Kress of the University of Michigan Ross School of Business.

On March 19, 2026, the U.S. bank regulatory agencies issued three notices of proposed rulemaking (NPRs) that would substantially weaken the regulatory capital framework for the largest U.S. banks. The proposals would: (1) revise the Basel III minimum risk-based capital rules for the largest banks; (2) recalibrate the surcharge for global systemically important banks; and (3) update the standardized approach risk-based capital rules.

These proposals are the latest in a sustained campaign to roll back the post-crisis capital framework. Earlier this year, the agencies finalized reductions to the supplementary leverage ratio for the largest banks, justifying that move on the premise that risk-based capital requirements would remain a binding constraint (see our September 2025 comment letter opposing those reductions). The latest proposals run directly counter to that premise. And the dilution of stress tests — another pillar of the post-crisis framework — compounds the effect further. The agencies present each change as modest and self-contained. But together, they represent a severe erosion of the safeguards put in place after 2008.

This post summarizes our forthcoming comment letter to the Federal Reserve, FDIC, and OCC opposing the proposals.

Two months ago, we argued that the Federal Reserve's balance sheet was already near its minimum level determined by demand factors, and that shrinking it significantly would risk heightened interest rate volatility without major changes that would themselves carry costs. To be sure, a smaller balance sheet is a worthy goal. It would reduce the Fed's presence in credit markets, limit the fiscal-like character that large-scale asset purchases acquire over time, and preserve dry powder for the next crisis.

Since our February post, both Fed policymakers and academicians have explored the factors influencing banks’ aggregate reserve demand, which is now the key driver of the Fed’s balance sheet scale. While they generally are more optimistic about reducing reserve demand, their proposals have not altered our judgment about the desired sequencing and pace of reserve management reforms.

Importantly, the proposed demand-reducing tools are largely untested at scale in the U.S. financial system. We do not know whether they would work as intended, how large their effects would be, or what unintended consequences they might produce. That uncertainty leads us to counsel caution and care, not confidence, as policymakers consider next steps.

This post discusses a range of reform options that are taking shape.

Whether the Federal Reserve’s balance sheet is big depends on your perspective. The current level of $6.5 trillion is more than six times the level before the Lehman Brothers failure in September 2008. It is also far above the pre-pandemic level of $4 trillion. At the same time, it is $2 trillion below the May 2022 peak of $8.9 trillion. As we noted in our July 2021 post, central bank balance sheets tend to expand sharply during periods of financial stress and do not contract back to their initial level. On occasion, this ratchet has the highly undesirable character of government finance.

Kevin Warsh – the President’s choice to succeed Jay Powell as Chair of the Federal Reserve Board – believes that the Fed’s balance sheet should shrink significantly. Whether he would like to return to the 2019 level of $4 trillion, or to the pre-Lehman level, we don’t know. Regardless, it raises a fundamental question: How should the Federal Reserve manage its balance sheet, and what are the risks of reducing it significantly from its current size?

To anticipate our conclusions, we believe that the current level is close to the level determined by demand factors in the current regulatory and market environment. Unless there are major changes in the Federal Reserve's operations or in regulatory arrangements, shrinking the balance sheet risks significant interest rate volatility that could undermine financial intermediation and credit provision. Reducing reserve demand by relaxing liquidity requirements could leave the banking system more vulnerable to a panic.

This post – co-authored with our friend and colleague, Richard Berner (NYU Stern School of Business) – was submitted in August 2025 as a comment to the U.S. bank regulatory agencies regarding their proposed modifications to the leverage ratio standards for U.S. global systemically important banks.

To Whom It May Concern:

We write to oppose the agencies’ proposal to alter the enhanced Supplementary Leverage Ratio (eSLR).

In our view, the proposal substantially weakens leverage, total loss-absorbing capacity, and long-term debt requirements for global systemically important banks (GSIBs). As a result, it would reduce key safeguards implemented in response to the 2008 financial crisis and add to the risks of serious financial instability and taxpayer-funded GSIB bailouts that Congress and the agencies sought to eliminate….

As most readers of this blog know, the Federal Reserve is an idiosyncratic mix of public and private. The Board of Governors of the Federal Reserve System is a part of the Federal Government, while the Federal Reserve Banks are private, nonprofit corporations and chartered banks owned by their commercial bank members. The operational capacity of the system – the ability to buy and sell domestic or foreign securities, provide loans to banks or foreign central banks, and engage in repurchase agreements or reverse repurchase agreements – belongs to the Reserve Banks. Then there is the Federal Open Market Committee (FOMC), which sets interest rate and balance sheet policy.

Recent attacks on Federal Reserve independence lead us to ask the following question: Who in the Federal Reserve System controls monetary policy? Put differently, to lower short-term market interest rates as he wishes, what aspect of the Federal Reserve would the President need to control? In this post, we attempt to answer this question.

Our new CEPR Policy Insight examines how three key technological innovations—blockchains, distributed ledgers, and tokenization—could reshape the future of finance. We review the current state of the crypto ecosystem, including its internal payments infrastructure, legitimate and illicit uses, and the reasons why crypto has failed to gain traction as a mainstream payments tool. We then turn to U.S. policymakers’ efforts to promote a “payments stablecoin,” considering the goals of an efficient and safe payments system and the barriers that stand in the way. Finally, we compare stablecoins with tokenized deposits and money market funds that replicate familiar financial assets in digital form but have received far less policy attention. We conclude that stablecoins are unlikely to compete effectively outside the crypto world against these no-less-digital instruments.

The Trump Administration is taking steps to integrate crypto into traditional finance, most notably the GENIUS Act’s establishment of a regulatory regime for “payment stablecoins.” To assess stablecoins’ likely impact on the future of payments, we compare them against a potential competitor that adds programmability and the potential for instant, low-cost cross-border settlement to a well-established bank product: tokenized deposits. Faced with crypto entrants in traditional financial services, the largest banks have powerful incentives to innovate, with the goal of maintaining and expanding their market share.