Warsh Targets Fed’s $6.8 Trillion Balance Sheet as Markets Brace for Slower Intervention Rules
Updated
Updated · CNBC · May 22
Warsh Targets Fed’s $6.8 Trillion Balance Sheet as Markets Brace for Slower Intervention Rules
2 articles · Updated · CNBC · May 22
Kevin Warsh is expected to push a medium-term overhaul of how the Fed uses its $6.8 trillion balance sheet, aiming to shrink its routine role in markets and set clearer rules for crisis intervention.
That debate reaches beyond rates: Warsh has called the balance sheet “bloated,” and some analysts say a new framework could rely more on repo markets than the federal funds rate to transmit policy.
Fed officials are already split. Michael Barr warned aggressive shrinkage could weaken bank resilience, disrupt money markets and even force more intervention, while others say a return to scarce reserves is feasible if done slowly.
The stakes are broad because Fed assets still equal about 23% of U.S. GDP after swelling from roughly $800 billion before 2008 to as much as $9 trillion during crisis-era support.
Any shift is likely to unfold gradually—research suggests up to $2.1 trillion could be cut under the current framework, but starting a larger redesign could take at least a year and several years to complete.
With the Fed stepping back, who will stabilize markets during the next major financial shock?
Will the Fed's historic 'regime change' actually lead to lower interest rates for everyday Americans?
As global conflict fuels inflation, is now the right time to remake America's central bank?
The Future of U.S. Monetary Policy: Warsh’s Vision for a Leaner Fed and Renewed Independence
Overview
Kevin Warsh, confirmed as the new Federal Reserve Chair, is set to bring major changes to the central bank. Known for his criticism of past monetary policy, Warsh advocates for a 'regime change' focused on substantially reducing the Fed’s $6.7 trillion balance sheet. His goal is to restore the Fed’s core mandates of price stability and maximum employment, but this ambitious plan carries risks, including potential market instability. Warsh’s approach aims to normalize monetary policy, yet it raises concerns about financial stability and the future independence of the Federal Reserve.