Trump expects his Fed chair nominee to cut -2-

Another, more controversial, idea is for the Fed to pay a lower interest rate on bank reserves above a certain threshold, Duffie said.

"If we could find ways to make the banking sector think it needed to hoard fewer reserves, that would allow the Fed to let its balance sheet shrink and ... that's just a win-win for everyone," Crandall said.

If the Fed can engineer less demand for reserves, it would likely stick to the program of simply shrinking its assets by letting them mature, Cabana at BofA said.

Guy LeBas, chief fixed-income strategist at Janney Capital Management, said it took 20 years to develop the intricate regulations and policies that require a lot of reserves, and it would be "hard to predict all the possible outcomes" of changes to these regulations.

"I doubt that these policies get changed in a quick way," he said.

A smaller balance sheet doesn't necessarily mean lower rates

While Warsh may make the argument that shrinking the balance sheet should result in lower rates, some experts are skeptical.

"The case for 100 basis points in cuts has the virtue of being broadly plausible, but is far from a slam dunk," Jon Faust, a former top adviser to Powell who is now a professor of economics at Johns Hopkins University, said in an email.

"Spinning a [rate] cut story for Trump, who desperately wants cuts, is very different from convincing a dubious FOMC," he added, referring to the Federal Open Market Committee, which sets interest rates.

Even if it were possible, reforming bank regulations will take a long time. That is not likely to satisfy an impatient president.

"I doubt whether the possible federal-funds rate cuts could come before the November midterm elections," Faust said.

In the end, Cabana said, he doesn't think the market would buy Warsh's argument that a smaller balance sheet, achieved in a way that didn't disrupt financial conditions, would warrant rate cuts.

"It may well be a line of reasoning they take. But that argument would be met with a high degree of skepticism in the market. If you decide to cut rates, it will add to the inflation risk," he said.

-Greg Robb

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(END) Dow Jones Newswires

04-18-26 0900ET