Mizuho Bank: The Federal Reserve's balance sheet size is shrinking, which will require the Fed to be more "active."

Kevin Warsh, the nominee for Federal Reserve Chairman by President Trump, hopes to shrink the central bank's balance sheet. Mizuho Securities believes this will require the Federal Reserve to play a more "interventionist" role in daily money market operations.

Returning to an environment of scarce reserves may lead to overdrafts in bank accounts and increase borrowing in the overnight market, thereby amplifying volatility in the money market and weakening the Federal Reserve's control over short-term interest rate targets.

To shrink the balance sheet, the Federal Reserve may need to replace the federal funds rate with a benchmark rate related to Treasury collateralized overnight repurchase agreements, which will require the central bank to conduct more frequent and aggressive daily interventions