New Bill Caps Federal Reserve Assets at 10% of GDP, Eliminates Key Lending Facility

The “Right-size the Federal Reserve Act” aims to put the central bank on a serious diet, fundamentally changing how it operates and how much power it has to intervene in the economy. This bill introduces a few big structural shifts, including hard limits on the Fed’s balance sheet and changes to bank reserve rules.

The most eye-catching provision is the one that sets a cap on the total assets held by all Federal Reserve banks: they can’t exceed 10% of the entire U.S. Gross Domestic Product (GDP). Think of this as putting a hard ceiling on the Fed’s ability to conduct large-scale asset purchases, which is the main tool they use to stabilize markets during a crisis. The catch? This cap doesn't kick in for 10 years, according to Section 2. While that gives the Fed a decade to adjust, it creates a long-term structural constraint that could limit their flexibility when the next big economic shock hits. For regular people, this matters because a less flexible Fed might struggle to prevent the kind of deep financial panic that affects mortgages, retirement accounts, and job stability.

Another major change affects how the Fed manages short-term liquidity. Section 2 mandates the elimination of the Overnight Reverse Repurchase Facility within one year. This facility is essentially a tool the Fed uses to manage the money supply day-to-day. The bill also explicitly forbids the creation of any new facility that is “similar to” the one being eliminated. This is a bit vague, but the intent is clear: reduce the Fed’s toolkit for managing short-term interest rates and market stability. If you’re a treasurer at a small bank or a large corporation, this means less certainty in the short-term lending markets.

On the regulatory side, the bill locks in current reserve requirements. It amends Section 19(b) of the Federal Reserve Act to ensure that the reserve requirements set by the Fed can never be lower than they were on March 25, 2020. This removes the Fed’s flexibility to lower reserve requirements—which they might do to encourage banks to lend more during a downturn—and mandates a specific floor. Furthermore, the bill increases transparency by requiring the Board and every Federal Reserve bank to send Congress an annual report detailing exactly how much interest they pay to foreign-owned banks and financial institutions on their reserves. This shines a spotlight on those payments, which could affect how foreign banks manage their U.S. dollar holdings.