"Kevin Warsh flags potential Fed balance-sheet reduction…pace likely to be tempered by market pushback"

Kevin Warsh, nominated as the next chair of the U.S. Federal Reserve (Fed), has again underscored the need to shrink the Fed’s balance sheet, though expectations are growing that any actual adjustment would be carried out gradually.

According to U.S. digital-asset (cryptocurrency) outlet O'Daily on the 3rd, a source said, "Warsh’s plan to reduce the Fed’s balance sheet is facing substantial resistance, and even if adjustments go ahead, they will proceed slowly."

Warsh has argued that the Fed’s roughly $7 trillion in assets is the result of intervention that has extended beyond Congress’s mandate. He has criticized the large-scale purchases of U.S. Treasuries carried out during quantitative easing (QE) for distorting financial markets, and has stressed the need to pare back assets.

However, the source said, "Warsh will not move to adjust assets until he has sufficiently consulted on the potential impact with the banking sector and the general public," adding, "It is unlikely he will actively pursue a plan to return the balance sheet to pre-2008 financial-crisis levels."

The source also said Warsh is expected to call for reviewing options for asset management through internal research and academic conferences ahead of policy implementation. Warsh believes the 2008 financial crisis showed that excessive reliance on the interbank market can threaten financial stability, and he has publicly proposed a 'third asset-management model' that differs from existing approaches.