--- title: "Dual Obstacles to Balance Sheet Reduction and Rate Cuts: The Dilemma Facing Warsh Upon Taking Office" type: "News" locale: "en" url: "https://longbridge.com/en/news/286795910.md" description: "Federal Reserve Chair nominee Warsh faces a dilemma regarding interest rate cuts and balance sheet reduction. Rising inflation and labor market resilience have weakened the likelihood of rate cuts, with futures markets pricing in no cuts for 2026. Meanwhile, the balance sheet reduction process has become difficult due to the potential for triggering turmoil in the bond market. There is a significant gap between Warsh's policy vision and the current economic environment, making it unclear whether he will secure support from the committee" datetime: "2026-05-18T15:51:11.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/286795910.md) - [en](https://longbridge.com/en/news/286795910.md) - [zh-HK](https://longbridge.com/zh-HK/news/286795910.md) --- # Dual Obstacles to Balance Sheet Reduction and Rate Cuts: The Dilemma Facing Warsh Upon Taking Office Federal Reserve Chair nominee Warsh secured his nomination with a policy agenda centered on interest rate cuts and balance sheet reduction. However, the economic environment he is about to inherit is simultaneously eroding the feasibility of both objectives. The unexpected rebound in inflation has significantly cooled the Fed's willingness to cut rates, while the resilience of the labor market has reduced the urgency for easing policies. Currently, average pricing in the futures market indicates that traders expect no interest rate cuts in 2026. At the same time, regarding the issue of reducing the balance sheet size, historical precedents at the Fed show that even gradual balance sheet reduction can trigger turmoil in the bond market, making the process arduous. Warsh has been confirmed by the Senate along party lines, but the timing of his formal swearing-in remains unclear. He is stepping into a monetary policy environment that differs markedly from his policy vision. ## **Inflationary Pressures Combined with Labor Market Resilience: The Window for Rate Cuts Has Narrowed** When Warsh was nominated in January, most of his future colleagues still viewed rate cuts as a matter of when, not if. However, this backdrop shifted rapidly. Escalating tensions involving Iran in late February drove energy prices sharply higher, pushing up overall inflation. This has made rate cut decisions increasingly difficult for any central bank. Both the European Central Bank and the Bank of England have warned that they may switch to raising rates this year. During his Senate confirmation hearings, Warsh hinted that he might push the Fed to reference alternative inflation indicators with relatively milder recent readings. But in the current environment, whether this strategy can gain majority support from the committee remains uncertain. Trends in the labor market have further undermined the case for easing policies. Weak employment reports in February once heightened market concerns about rising unemployment, but subsequent data for March and April showed that the labor market had not lost momentum, with the unemployment rate remaining at low levels. Warsh had previously endorsed rate cuts citing productivity gains brought by artificial intelligence. However, the persuasiveness of this argument has been greatly diminished in the current inflationary environment. ## The Balance Sheet Reduction Dilemma: Very Limited Operational Room Warsh has long criticized the Federal Reserve's balance sheet as being excessively large. The Fed expanded its balance sheet massively during the 2008–2009 financial crisis and the pandemic, with assets approaching a peak of nearly $9 trillion in 2022; they currently stand at approximately $6.7 trillion. Reducing the asset size requires simultaneously compressing the liability side, yet the Fed's liabilities are crucial for the smooth operation of the economy. Among the Fed's main liabilities, deposits held by the Treasury in its checking account at the Fed and physical cash are largely beyond the Fed's direct control; the overnight reverse repurchase agreement facility, which once exceeded $2 trillion in size, has nearly dwindled to zero during the previous round of balance sheet reduction. Consequently, the only substantive room for compression lies in bank reserves. The Fed has full control over the supply of reserves, and most balance sheet reduction plans point to compressing this liability item. However, events last autumn clearly revealed the underlying fragility: a mild decline in reserves triggered intense anxiety in the bond market, forcing the Fed to quickly reverse course and resume expanding reserves. This means Warsh's balance sheet reduction plan faces not only internal policy disagreements but also unpredictable market risks. ## **Internal Divisions: Consensus Is Hard to Sustain** Leading the Fed means building consensus among the other 11 officials who also hold voting rights on interest rates. Once Warsh pushes for rate cuts or balance sheet reduction, he is likely to encounter resistance from new colleagues, one of whom is the outgoing current Chair Powell. For much of Powell's tenure, committee decisions were characterized by consensus. However, divisions within the voting committee have intensified significantly over the past year. At the most recent meeting in late April, the Fed kept interest rates unchanged, yet four officials voted against the decision. Three of them believed the Fed should begin signaling that the probabilities of hiking and cutting rates have become roughly equal. In the quarterly interest rate path projections, the median forecast by officials in March was for only one rate cut this year and another next year. This forecast will be updated at next month's meeting. Risk Disclosure and Disclaimer The market involves risks, and investment should be approached with caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial status, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment decisions made based on this content are taken at the user's own risk. ### Related Stocks - [.IXIC.US](https://longbridge.com/en/quote/.IXIC.US.md) - [.SPX.US](https://longbridge.com/en/quote/.SPX.US.md) - [.DJI.US](https://longbridge.com/en/quote/.DJI.US.md) - [.NDX.US](https://longbridge.com/en/quote/.NDX.US.md) ## Related News & Research - [Fed's Goolsbee; Inflation has got to be front of mind when Warsh starts as chair](https://longbridge.com/en/news/286812315.md) - [A new day at the Fed, but policy forecast cloudy for Warsh, Trump, US](https://longbridge.com/en/news/286750351.md) - [Fed's Miran says he will vacate board seat on or just before Warsh is sworn in as chair](https://longbridge.com/en/news/286453846.md) - [Odds against rate cuts high as new US Fed chair set for swearing in](https://longbridge.com/en/news/286826861.md) - [The bond market is already hiking rates as Kevin Warsh takes over as Fed’s new chair](https://longbridge.com/en/news/286476010.md)