Another, more controversial, idea is for the Fed to pay a lower interest rate on bank reserves above a certain threshold, Duffie said.
&#34;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,&#34; 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 &#34;hard to predict all the possible outcomes&#34; of changes to these regulations.
&#34;I doubt that these policies get changed in a quick way,&#34; 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.
&#34;The case for 100 basis points in cuts has the virtue of being broadly plausible, but is far from a slam dunk,&#34; Jon Faust, a former top adviser to Powell who is now a professor of economics at Johns Hopkins University, said in an email.
&#34;Spinning a [rate] cut story for Trump, who desperately wants cuts, is very different from convincing a dubious FOMC,&#34; 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.
&#34;I doubt whether the possible federal-funds rate cuts could come before the November midterm elections,&#34; 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.
&#34;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,&#34; he said.
-Greg Robb
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
04-18-26 0900ET

NDAQ

GOVT

Trump anticipates his Fed chair nominee will implement interest rate cuts. Experts express skepticism about the feasibility of such cuts, citing the complexity of banking regulations and the potential inflation risks. While some suggest that a smaller Fed balance sheet could lead to lower rates, others doubt this will satisfy the market or occur before the midterm elections. The discussion highlights the challenges of reforming bank policies and the differing opinions on the impact of these changes on interest rates.

- The article discusses the Federal Reserve's potential policy changes regarding bank reserves and interest rates.  
- Experts express skepticism about the impact of shrinking the Fed's balance sheet on interest rates, highlighting the complexities of regulatory changes and their implications.  
- There is a consensus that significant policy shifts will take time and may not align with political pressures, particularly in the lead-up to the November midterm elections.

Trump expects his Fed chair nominee to cut -2-