How will Kevin Warsh's plan to reduce the Fed's balance sheet work?
Fortune • • general
Key Points:
- Kevin Warsh, a Fed nominee, advocates for a smaller Federal Reserve balance sheet to reduce market distortions caused by the Fed's large holdings of government debt, but shrinking it risks raising Treasury borrowing costs by pushing up bond yields.
- Warsh aims to balance reducing the balance sheet with maintaining the Fed's role as a fiscal safety net, navigating political and market sensitivities without alarming investors or the Treasury.
- He proposes shrinking the balance sheet gradually and in coordination with the Treasury, potentially enabling rate cuts and stimulating the economy, but effective communication is critical to avoid market volatility.
- While Warsh has criticized government budget expansions, he is unlikely to intervene directly in fiscal policy, focusing instead on monetary policy within the Fed's mandate.
