Fed Faces ‘Trilemma’ of How Big Its Balance Sheet Should Be

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 R. Jay Kahn wrote in a paper published Wednesday.

“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 ...