Fed chair nominee Warsh may want smaller Fed holdings, but that's not easy to do

Core Viewpoint - Kevin Warsh, nominated to be the next Federal Reserve chair, aims to significantly reduce the central bank's multi-trillion-dollar balance sheet, but experts believe this will be challenging and slow to achieve, if possible at all [1]. Group 1: Federal Reserve's Balance Sheet Management - The Fed's current holdings and the management regime for interest rates in a cash-rich environment make it difficult to unwind the balance sheet while maintaining market stability and achieving monetary policy goals [2]. - Warsh has previously argued that the large Fed holdings distort financial conditions and should be significantly reduced, with the proceeds used to lower interest rates to support households and small businesses [3]. - The Fed's balance sheet expanded to a peak of $9 trillion during the COVID-19 pandemic due to crisis buying, and a contraction process known as quantitative tightening (QT) has since reduced it to $6.6 trillion by late 2025 [4]. Group 2: Challenges in Reducing the Balance Sheet - The use of the balance sheet as a monetary policy tool has become standard, especially with the likelihood of short-term rates being cut to near-zero levels during economic troubles [5]. - Experts indicate that while Warsh may desire a smaller balance sheet and reduced Fed presence in financial markets, actually achieving this reduction is unlikely, as banks prefer the current level of reserves [6].