How Kevin Warsh Could Shrink the Fed’s Footprint in Financial Markets

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How Kevin Warsh Could Shrink the Fed’s Footprint in Financial Markets

President Trump’s nominee to become the next chair of the Federal Reserve wants to overhaul the central bank, including its more than $6 trillion balance sheet.

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“It took 18 years to create this balance sheet problem, and we won’t be able to fix it in 18 minutes,” Kevin M. Warsh, the Federal Reserve chair nominee, told lawmakers on Tuesday.

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Kenny Holston/The New York Times

By

Colby Smith

Colby Smith covers the Federal Reserve.

April 24, 2026,

10:08 a.m. ET

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To Kevin M. Warsh, the Federal Reserve’s more than $6 trillion portfolio of government bonds and mortgage-backed securities is emblematic of everything that has gone wrong at the institution he hopes to lead.

The Fed’s decision to expand its portfolio by so much and so quickly since the 2008 global financial crisis has stoked inflation, worsened inequality and distorted the process of how financial assets are priced, according to Mr. Warsh, who is awaiting confirmation to become the next chair. The growing size of the investments on its balance sheet has jeopardized the Fed’s own independence by treading into territory far outside its congressional mandate, he believes. And it has made Wall Street overly reliant on the Fed, creating an unhealthy expectation that the central bank will always be ready to ride to the rescue.

Mr. Warsh’s plan to rectify this appears, on the surface, relatively straightforward. He wants the Fed to have a smaller footprint in financial markets and for there to be closer coordination with the Treasury Department on what the Fed holds in its portfolio and what the government issues in terms of debt to fund itself. Mr. Warsh has argued that reducing the central bank’s holdings will give officials space to lower interest rates, something President Trump has long desired. The rationale is that longer-term rates are likely to rise as the balance sheet shrinks, which then could be offset by lowering short-term rates.

Achieving all of this will be anything but straightforward, however. It will take careful planning and a significant amount of time in order to avoid creating damaging volatility.

There are already jitters about the direction that Mr. Warsh will push the Fed if confirmed by the Senate. Among his first tasks will be to overcome

lingering doubts

about how susceptible he will be to pressure from the president, who wants more influence over the institution.

But there is a second hitch as well. Fresh in the minds of Fed officials and investors across Wall Street is a 2019 episode in which policymakers reduced the balance sheet by too much, causing short-term interest rates to spike. That episode was a “near heart attack” for markets, said James Clouse, who served as deputy director of the Fed’s division of monetary affairs at that time, leaving a “pretty profound, lasting impact on the way people have thought about the balance sheet.”

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