By Matt Grossman
Kevin Warsh says that the Fed needs to shrink its balance sheet, arguing that its large holdings of government debt give the central bank too big a presence in financial markets.
Many experts on this arcane but important aspect of financial plumbing agree that shrinking the balance sheet is feasible, but argue it would probably prove a challenging and long-term effort.
Quickly reducing the Fed's bondholdings without embarking on other market and banking reforms would likely spark sharp financial-market volatility, a threat apparent last fall when even a gradual reduction in the Fed's bond portfolio caused volatile jumps in overnight borrowing costs.
Current Fed officials have said any serious attempt to reduce the Fed's presence in financial markets would have to come alongside a wholesale regulatory-reform agenda. The goal would be to allow banks to make do with less money parked in their Fed deposit accounts than they now depend on, which could give the Fed room to reduce its bondholdings without choking funding markets.
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(END) Dow Jones Newswires
April 21, 2026 11:58 ET (15:58 GMT)
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