Core Viewpoint - The Federal Reserve should continue to reduce its balance sheet size, but not as aggressively as some observers suggest, according to Waller [1][2]. Group 1: Balance Sheet Management - Waller proposes reducing bank reserves from $3.26 trillion to approximately $2.7 trillion, which would bring the total balance sheet down to $5.8 trillion from the current $6.7 trillion [1]. - The minimum "adequate" level of reserves is crucial for estimating how much the Fed can shrink its balance sheet without disrupting the overnight funding market [1]. - Critics argue that the Fed's balance sheet has grown too quickly and should return to pre-financial crisis levels, which were around $800 billion [2]. Group 2: Duration Matching Strategy - Waller highlights that the Fed's balance sheet has a mismatch in the duration structure of assets, with too high a proportion of long-term assets [3]. - He advocates for a "duration matching strategy," suggesting that about half of the Treasury investments should be in short-term bills [3]. Group 3: Interest Rate Policy - Waller believes the current federal funds rate is overly restrictive and may support a rate cut at the upcoming Fed meeting, contingent on continued inflation decline [6]. - He has consistently advocated for lowering the policy rate since November 2023, arguing that tariffs will cause temporary price increases but not sustained inflation [6]. Group 4: Waller's Position and Recognition - Waller is considered a strong candidate for the next Fed chair, recognized for his data-driven approach to monetary policy [7]. - His balanced stance, neither hawkish nor dovish, has earned him broad recognition in both market and policy circles [7].