The Federal Reserve has to grapple with the question of how big its balance sheet should be after it stopped shrinking its $6.5 trillion portfolio, according to economists at the central bank.
Determining the optimal size of a central bank’s balance sheet involves a trade-off between a small size, low interest-rate volatility and limited market intervention, researchers Burcu Duygan-Bump and
“Central banks face a ‘balance sheet trilemma’ in that they can achieve only two” of these goals at once, the researchers wrote. “The underlying tension between these goals is ...