President Donald Trump has tapped Kevin Warsh to run the most powerful central bank on the planet in 2026, but the biggest issue on his desk is the Federal Reserve's $6.6 trillion balance sheet. Everyone keeps talking about interest rates, but the real weight is this pile of assets that the Fed has been neglecting for years.
This is nothing new for Kevin. For more than a decade, he's been shouting about how big the Fed has become. He blamed his former colleagues for blowing up their balance sheets after 2008 and during COVID-19.
On news that he might cut interest rates, bond yields soared, the dollar strengthened and gold and silver plunged. “He has been very critical of the Fed's balance sheet expansion,” said Zach Griffiths of Creditsights.
Kevin could reduce the Fed's balance sheet as President Trump tries to lower borrowing costs
But there's a problem. Kevin's plan doesn't match what President Trump wants. In January, President Trump directed Fannie Mae and Freddie Mac to buy $200 billion worth of mortgage-backed securities to help people get cheaper home loans.
But Kevin objects that the Fed holds so many assets to keep interest rates low. “If you take Kevin at his word that he doesn't like balance sheet expansion as a way to compress yields, then that's going to be the Treasury's responsibility,” said Greg Peters of PGIM Fixed Income.
Treasury Secretary Scott Bessent agrees with Kevin. Both want the Fed to do less and let the Treasury Department do more. Kevin's idea is simple: reduce the Fed's role and breathe life into private markets. But that could mean higher long-term interest rates, which is exactly what President Trump is trying to avoid.
“Theoretically, you can move short-term rates to offset what you're doing on the balance sheet… and then if that causes long-term rates to rise, you can lower short-term rates to balance it out,” Stephen Millan, who also currently works at the Fed and was appointed by President Trump, told Bloomberg TV.
When Kevin was at the Fed from 2006 to 2011, he was one of the early proponents of quantitative easing, but over time he became more opposed to it. He left the Fed because it wouldn't stop. During the 2008 crash and again during the pandemic, the Fed bought trillions of dollars in Treasuries and other bonds to prevent the system from collapsing.
Kevin now says that policy has gone too far. “Let's run the printing presses a little bit less, shrink the balance sheet, let Secretary Bessent handle the financial accounting, and we can lower interest rates significantly,” he said on Fox Business.
Tight liquidity, changing strategies, and infighting at the Fed
Kevin also told CNBC that he would like to see a new agreement between the Fed and Treasury, similar to the 1951 agreement that ended central bank support for wartime bonds. “We need a new Treasury-Fed agreement like the one we had in 1951,” he said. The idea is to allow the Fed and Treasury to openly say how big their balance sheets should be.
“Anything that reduces the financial burden on the Federal Reserve is a good thing,” said Peter Boockvar of One Point BFG. Still, even he said the balance sheet is “huge.” It will not be easy to cut it.
The Fed's current system, known as the Abundant Reserve Framework, was established after the 2008 financial crisis. This is designed to ensure that banks always have enough cash on hand to maintain liquidity. Joseph Abate of SMBC Nikko Securities says balance sheet size is actually based on what a bank needs to meet regulatory rules. If Kevin cuts rates too soon, banks could find it difficult to borrow short-term.
At the end of 2025, the Fed began shrinking its holdings, which caused problems. Increased government borrowing and further reductions in Fed purchases have depleted the system of cash. The Fed had to stop and switch from buying $40 billion of short-term Treasuries each month just to stabilize the market.
Barclays strategists Samuel Earle and Demi Hu said Kevin could end these monthly purchases and raise funding costs beyond the Fed's target range. Alternatively, the Fed could change the composition of its bond portfolio to hold short-term bonds. Currently, the average maturity of the Fed's assets is more than nine years, while its liabilities (including reserves and the Treasury's general account) average about six years.
All this said, Kevin is not running the Fed alone. He has one vote on the Federal Open Market Committee. Analysts at JPMorgan said some other Fed members may support his ideas, but most still support maintaining deep reserves. “Significant balance sheet shrinkage would likely require significant changes to the Fed's existing banking regulatory framework,” BMO's Beil Hartman said.
