Why the New Fed Chair May Struggle to Slim Down the Central Bank

Key Takeaways

• The Federal Reserve’s balance sheet has grown to $6.6 trillion.
• The incoming Fed Chair, Kevin Warsh, could seek to reduce that amount when he takes over in May.
• Reducing the Fed’s balance sheet could increase market volatility and raise mortgage rates.

When Federal Reserve Chair nominee Kevin Warsh joined the Fed in 2006, the central bank had less than $850 billion in assets. It now has $6.6 trillion, or nearly eight times more.

The gargantuan rise has long drawn skepticism from Warsh, who may now decide it’s time to reduce the Fed’s footprint in financial markets. But that footprint also helped calm markets during panic. The Fed absorbed trillions of bonds during the 2008 and 2020 crashes. And it spurred ultra-low mortgage rates in 2020, prompting a boom in homebuying and refinancing.

Moreover, markets are now used to a massive Fed balance sheet—and a return to pre-2008 conditions would be tricky, to say the least.

“Doing it is akin to forcing the toothpaste back into its container. Not impossible, but it risks being a right mess,” wrote Padhraic Garvey, regional head of research for the Americas at the Dutch bank ING.

Warsh hasn’t shared his views on the Fed’s balance sheet since President Donald Trump picked him to lead the Fed on Jan. 30. In an op-ed last year, he said the Fed’s balance sheet is “bloated” and can be “reduced significantly.” He argued that would enable the Fed to cut interest rates, as Trump has pushed the central bank to do.

“Money on Wall Street is too easy, and credit on Main Street is too tight,” he wrote.

Analysts, however, note that a smaller Fed balance sheet could make markets more volatile and push up mortgage rates—undercutting Trump’s goal to make homebuying cheaper.

It is one reason why some don’t anticipate an aggressive makeover.

“Warsh is unlikely to be as balance sheet hawkish as funding markets fear,” Bank of America rates strategist Mark Cabana wrote to clients.

Why This Matters

The Fed’s balance sheet size influences mortgage rates, market stability, and borrowing costs. Any shift under Warsh could affect homebuyers, investors, and banks alike.

QE’s Track Record

For consumers, the Fed’s bond-buying has had tangible impacts. Mortgage markets were busy in 2020 and 2021, as ultra-low interest rates spurred homebuyers and gave homeowners big monthly savings if they refinanced.

The Fed’s 2008 bond-buying program—known as quantitative easing—also stabilized markets at the depths of the crisis. The exact impact of later rounds of QE in 2010 and 2012 remains under debate among economists. But the goal was to keep borrowing costs low, making it cheaper for businesses to invest long-term and give support to the beleaguered mortgage market.

Both times the Fed has wound down the QE programs, the central bank’s balance sheet has remained in the trillions.

The most recent slimdown took the Fed’s balance sheet from a post-COVID peak of nearly $9 trillion to today’s $6.6 trillion. It stopped “quantitative tightening” late last year, as signs emerged that the Fed’s effort to pull money out of the system had reached a limit.

Fed officials remain wary of repeating September 2019, when the plumbing of the financial system clogged up as cash stopped flowing smoothly. The disruptions led to a spike in interest rates, forcing the Fed to pump cash back into the system.

All the while, the Fed has faced some criticism over QE. Some argue the Fed’s purchases have contributed to inequality, driving up stock prices by making borrowing cheaper and markets calmer. Others, including Warsh, worry that those periods of calm make the economy more vulnerable—and force the Fed to take ever-larger actions in response to market sell-offs.

Warsh said in April 2025 that QE has “become a near permanent feature of central bank power and policy.” He argued that it made it easier for Congress to grow deficits, knowing that the Fed’s bond purchases would keep the government’s financing costs low.

“Each time the Fed jumps into action, the more it expands its size and scope, encroaching further on other macroeconomic domains,” Warsh said in a speech. “More debt is accumulated, more capital is misallocated, more institutional lines are crossed, risks of future shocks are magnified, and the Fed is compelled to act even more aggressively the next time.”

Ample vs. Scarce

At its core, the debate is about whether money should be scarce or ample.

Before 2008, the financial system operated with money being scarce. Banks had relatively little cash on hand, and they borrowed from each other daily if they needed cash to fulfill large customer requests. The price they charged each other was the federal funds rate. And to keep that rate at its intended level, the Fed added or removed money from banks daily.

By flooding markets with cash in 2008, the Fed’s textbook way of managing interest rates stopped working. But Congress also overhauled bank regulations after several lenders collapsed during the financial crisis, with changes that made banks safer but also ensured a supersized Fed balance sheet.

Analysts caution that any changes on that front—even if they aren’t wholesale rollbacks—carry their own set of risks.

Related Education

Understanding Reserve Requirements: Definitions, History, and Impact

How Does the Fed Reduce Its Balance Sheet?

The key safeguards in question ensure banks hold more cash than they used to, helping keep them afloat even if customers pulled vast sums of cash during a panic. Banks cherish the safety cushions they’ve built—many choose to hold significantly more than regulators require. But they hold that cash at the Fed, thus driving up the central bank’s balance sheet.

“Altering liquidity requirements may reduce demand for reserves and permit a smaller Fed balance sheet, but reduced liquidity buffers could impair financial system resilience in periods of stress,” Michael Gapen, chief U.S. economist at Morgan Stanley, wrote. “There is no free lunch.”

Despite his years of skepticism over QE, Warsh is likely to be on “team ample,” BofA’s Cabana wrote. Warsh may judge that the benefits of switching back to scarce reserves aren’t worth the cost of more volatile funding conditions, Cabana wrote.

There “doesn’t appear to be a straightforward path to a smaller central bank footprint in financial markets,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. Any major changes “run the risk of destabilizing the funding market,” he wrote.

And one key answer to a smaller Fed balance sheet—reducing banks’ demand for cash reserves—involves regulatory changes that take months, if not years.

“This isn’t to suggest that a smaller balance sheet is unattainable for a Warsh-led Fed, rather that achieving one is likely to play out over a longer timeframe,” Lyngen wrote.

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