What is Kevin Warsh's view on the Federal Reserve's balance sheet?

Kevin Warsh believes the Federal Reserve's balance sheet is "bloated" and that its expansion has been a main driver of inflation.

How could shrinking the Fed's balance sheet impact interest rates?

Warsh argues that shrinking the Fed's balance sheet could allow for lower interest rates by reducing the amount of money flooded into the system.

What challenges exist in shrinking the Federal Reserve's balance sheet?

Shrinking the balance sheet has previously caused market disruptions, such as spikes in repo funding rates, and Fed officials have cited risks to money markets.

Home / Business and Economy / Warsh: Shrink Fed Balance Sheet for Lower Rates

Warsh: Shrink Fed Balance Sheet for Lower Rates

2 Feb

•

Summary

Shrinking the Fed's balance sheet could enable lower interest rates.
The Fed's balance sheet is over $6.5 trillion, down from $9 trillion.
Easy money policies have driven inflation, according to Warsh.

Warsh: Shrink Fed Balance Sheet for Lower Rates

Kevin Warsh contends that the Federal Reserve's balance sheet has become "bloated," contributing significantly to inflation. He advocates for shrinking this balance sheet, suggesting it could pave the way for lower interest rates.

The Fed's balance sheet, currently exceeding $6.5 trillion, has been a key driver of liquidity in financial markets since the 2008 crisis and the Covid-19 pandemic. While the Fed has already begun a process of quantitative tightening, reducing its holdings from a peak of nearly $9 trillion in 2022, Warsh proposes broader changes.

Warsh suggests that the current "ample reserves" regime, where the Fed pays interest on bank reserves to influence rates, has made money too accessible on Wall Street while credit remains tight for Main Street. He believes redeploying this liquidity could benefit households and businesses.