Fed Chair Nominee Warsh Faces Hurdles in Shrinking $6.6 Trillion Portfolio – Bloomberg
If you’ve been following U.S. monetary policy lately, you may have noticed renewed debate around the size of the Federal Reserve’s balance sheet. At the center of this discussion is Kevin Warsh, a former Federal Reserve governor and current Fed chair nominee, who believes the central bank has grown far too large.
It’s a bold stance—but one that many experts say will be extremely difficult to turn into reality.
Why the Fed’s Balance Sheet Matters
The Federal Reserve doesn’t just set interest rates. Over the past two decades—especially during the 2008 financial crisis and the COVID-19 pandemic—it has relied heavily on buying government and mortgage bonds to stabilize markets. These actions ballooned the Fed’s balance sheet to nearly $9 trillion at its peak in 2022.
While this approach helped prevent economic collapse, critics like Warsh argue it distorted markets, favored Wall Street, and expanded government financing in unhealthy ways.
The System Is Built on High Liquidity
Here’s the hard truth: today’s monetary system depends on banks holding massive reserves. These reserves allow the Fed to control short-term interest rates smoothly using automated tools introduced in 2019. Shrink the balance sheet too aggressively, and money markets could become volatile—fast.
Analysts warn that without major regulatory changes, reducing Fed holdings could undermine the Fed’s ability to manage inflation and employment, its two core mandates.
Warsh vs. Financial Reality
Warsh, who is expected to succeed Jerome Powell after his term ends, believes a smaller balance sheet could restore fairness and efficiency to financial markets. His views align with long-standing conservative criticism of central bank intervention, often supported by policymakers from the Trump administration.
However, market strategists from major banks argue that shrinking liquidity too much could trigger funding stress, higher borrowing costs, and even financial instability—outcomes far worse than the problem Warsh wants to solve.
Can Rules Be Changed?
Some economists believe regulatory tweaks—such as lowering banks’ required liquidity buffers or improving access to emergency Fed lending—could eventually make a smaller balance sheet possible. But even optimists admit this would take quarters or years, not months.
For now, most observers expect financial realities to temper any aggressive push for balance-sheet reduction.
The Bottom Line
Warsh’s vision of a leaner Federal Reserve may sound appealing, especially to those wary of government overreach. But in a system now engineered around abundant liquidity, shrinking the Fed’s footprint isn’t just hard—it could be risky.
As markets see it, stability still outweighs ideology.
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