What are the implications of a shrinking Fed balance sheet? in World Economy News 16/02/2026 That Kevin Warsh, President Donald Trump’s nominee to be the next Federal Reserve Chair, has long been critical of the central bank’s sizeable bond holdings is no secret. Warsh has called for a reduction in the Fed’s balance sheet, arguing that a large amount of holdings could end up distorting the overall state of finances in the U.S. economy. Following a major campaign to expand its balance sheet to help support the economy during the global financial crisis and COVID-19 pandemic, the Fed has let it fall from as high as $9 trillion in 2022 to $6.6 trillion late last year. However, the Fed once again began to grow out its balance sheet in December, as part of a bid to ensure that there was enough liquidity within the financial system to keep interest rates floating around officials’ target range. It is now unclear if Warsh will push to end this process, analysts have suggested. Writing in a note, the BofA analysts including Mark Cabana and Katie Craig argued that while Warsh has often taken a critical stance against the Fed’s balance sheet policies, they “suspect he would find it easier to be” a critic versus a “change agent.” They added that, to shrink the balance sheet’s size, Warsh would need to also lower its liabilities, possibly through changes in bank liquidity guidance and regulations. But “[i]f Warsh pushes too hard on Fed sheet reduction, it could risk funding vol[atility], broader [market volatility], [and] tighter fin[ancial] conditions,” they wrote. “We suspect Warsh to favor easy fin[ancial] conditions over smaller Fed sheet, given difficulty of reducing Fed liabilities.” The analysts flagged that President Trump, in particular, would likely care more about financial conditions than the Fed’s reserves, adding that Warsh is “likely to side with Trump.” Meanwhile, economists at Morgan Stanley noted that the mechanics of a balance sheet drawdown are “tricky” and “changes are likely to be slow, with plenty of trade-offs that need to be considered, and market implications that may be underappreciated.” They said the Fed may opt to reduce its holdings either by allowing securities to mature without reinvestment or selling them actively in the secondary market. The first tactic has “done most of the heavy lifting so far,” and could continue to do so “if the Fed goes down this path,” they wrote. Warsh, for his part, has said that shrinking the balance sheet would be hard to do, especially because it is used to manage the Fed’s target range for interest rates. Source: Investing.com 2026-02-16 hellenicshippingnews... window.___gcfg = {lang: 'en-US'}; (function(w, d, s) { function go(){ var js, fjs = d.getElementsByTagName(s)[0], load = function(url, id) { if (d.getElementById(id)) {return;} js = d.createElement(s); js.src = url; js.id = id; fjs.parentNode.insertBefore(js, fjs); }; load('//connect.facebook.net/en/all.js#xfbml=1', 'fbjssdk'); load('https://apis.google.com/js/plusone.js', 'gplus1js'); load('//platform.twitter.com/widgets.js', 'tweetjs'); } if (w.addEventListener) { w.addEventListener("load", go, false); } else if (w.attachEvent) { w.attachEvent("onload",go); } }(window, document, 'script')); tweet Share