Wall Street Projects Fed's Balance Sheet Reduction Path After Walsh Takes Office, Expects Central Bank to Pay a High Price
Wall Street strategists believe that Federal Reserve Chairman nominee Kevin Warsh, appointed by Trump, has several ways to reduce the central bank’s $6.6 trillion balance sheet, but the process is costly and extremely time-consuming.
Warsh has previously called for the Federal Reserve to significantly scale back its activities in the financial markets, sparking heated discussions about the size of its portfolio. After several rounds of crisis-driven asset purchases, the Fed’s holdings have expanded dramatically. The minutes from the January policy meeting, scheduled for release on Wednesday, may reflect policymakers’ latest considerations on the balance sheet.
Kansas City Fed President Jeff Schmid stated last week that the large portfolio could blur the lines between monetary policy and fiscal policy. Vice Chair for Supervision Michelle Bowman has also advocated for shrinking the balance sheet.
Strategists say that potential options for reducing the balance sheet include: relaxing regulatory requirements that encourage banks to hold large reserves at the central bank, or shortening the average maturity of the Fed's holdings. The Fed could also stop purchasing Treasury bills or even directly sell securities.
A less likely path is to resume asset reduction, the so-called quantitative tightening. Due to increased government borrowing putting pressure on money markets, the central bank abandoned this process in December. Subsequently, the Fed shifted to purchasing Treasury bills to re-inject reserves into the system.
No matter which path the Fed under Warsh’s leadership takes, it may take several years. “I think the earliest this could happen is 2027,” said Seth Carpenter, Global Chief Economist at Morgan Stanley and former Deputy Director of the Federal Reserve’s Division of Monetary Affairs.
Jonathan Cohn, Head of US Rate Strategy at Nomura Securities International, stated that this must also receive the consent of Treasury Secretary Scott Besant.
Editor: Ding Wenwu
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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