Newly confirmed Federal Reserve Chair Kevin Warsh’s plans to shrink the Fed’s $6.7 trillion balance sheet face significant obstacles from rising US debt, waning appeal of Treasury bonds and climbing long-term interest rates.
According to Reuters, incoming Federal Reserve Chair Kevin Warsh’s ambition to reduce the central bank’s role in financial markets could be undermined by rising federal debt and declining demand for US Treasury bonds, with analysts warning of higher long-term interest rates ahead.
Warsh, confirmed by the US Senate on Wednesday to replace Jerome Powell, has advocated for a smaller Fed balance sheet and less market intervention. However, Stanford finance professor Hanno Lustig warned that to achieve this, the Fed must be transparent, saying: “In order to have real price discovery in the Treasury market, we need a central bank that will not intervene.”
Former Richmond Fed chief Jeffrey Lacker said Warsh’s approach “resonates strongly” with those wanting restrained central banking, but added it would “aid in sort of the general process of the Treasury as it has to…face the music in essence.”
Reuters noted the Fed currently holds about $6.7 trillion in assets, with the Congressional Budget Office projecting a federal deficit of 5.8% of GDP for 2026.
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