--- title: "Waller may hope for the Federal Reserve to reduce its balance sheet, but this goal is difficult to achieve" type: "News" locale: "zh-HK" url: "https://longbridge.com/zh-HK/news/276119532.md" description: "Kevin Warsh, nominated for the Federal Reserve Chair, hopes to reduce the Federal Reserve's balance sheet, but significant adjustments to the financial system are necessary to achieve this. Analysts point out that the space for reducing asset size is limited by liquidity levels and management tools, and regulatory adjustments are needed to lower bank reserve requirements. Experts warn that a substantial reduction could lead to market volatility risks, and Warsh's criticisms of the Federal Reserve mainly focus on its use of policy tools" datetime: "2026-02-17T11:53:42.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/276119532.md) - [en](https://longbridge.com/en/news/276119532.md) - [zh-HK](https://longbridge.com/zh-HK/news/276119532.md) --- > 支持的語言: [简体中文](https://longbridge.com/zh-CN/news/276119532.md) | [English](https://longbridge.com/en/news/276119532.md) # Waller may hope for the Federal Reserve to reduce its balance sheet, but this goal is difficult to achieve Kevin Warsh, who has been nominated to head the Federal Reserve, may hope to **reduce the balance sheet** of the central bank, but it is basically impossible for him to do so unless there are significant adjustments to the financial system; even with adjustments, it may not be feasible. The reason is that the current system the Federal Reserve relies on to achieve its monetary policy goals **depends on the banking system holding a large amount of funds**. The liquidity level of the financial system, as well as the tools the central bank uses to manage liquidity, ultimately limit the Federal Reserve's ability to shrink its asset size while maintaining smooth operation in the money market. Most observers of the Federal Reserve believe that breaking through this market constraint requires simultaneous adjustments to the way the Federal Reserve manages money market interest rates and modifications to regulatory provisions that affect bank reserve demand. Analysts at Bank of Montreal Capital Markets stated: “There is **no simple and direct path** to significantly reduce the Federal Reserve's share in the financial markets. The reality is that a substantial reduction in (open market operation accounts) holdings may not be feasible unless regulatory reforms are implemented to lower banks' demand for reserves — and this process will take several quarters, not just a few months.” Economists Stephen Cecchetti of Brandeis University and Kim Schoenholtz of New York University wrote in a blog post on February 8: “We agree that an oversized central bank balance sheet facilitates government financing, which is highly undesirable,” and it also interferes with financial markets. However, under the current rules and interest rate control tools, “**a significant contraction of the balance sheet would expose the short-term market to enormous volatility risks — this remedy could be worse than the problem itself**.” **Warsh has long questioned the large-scale balance sheet** At the end of last month, the Trump administration nominated Warsh to succeed current Chairman Jerome Powell after his term ends in May. This potential Federal Reserve leader served as a Fed governor from 2006 to 2011 and has been a staunch critic of the central bank. One of his main grievances is the Fed's practice of using bond and cash holdings as policy tools. From the financial crisis nearly twenty years ago to the outbreak of the COVID-19 pandemic in 2020, the Federal Reserve has stabilized distressed markets by massively purchasing U.S. Treasuries and mortgage-backed securities, providing stimulus when interest rates could not be lowered further. This has led to the Federal Reserve's asset size swelling to previously unimaginable levels — total holdings peaked at **$9 trillion** in the spring of 2022. During the two cycles of large-scale balance sheet reduction by the Federal Reserve, the size has never come close to returning to the levels before the bond purchases began. To manage this system, the Federal Reserve officially established a basic automated interest rate tool in 2019, which can absorb and inject cash, and has special tools to quickly provide liquidity when needed. This mechanism collectively ensures that the Federal Reserve maintains its interest rate targets at levels expected by officials. Warsh's most recent criticism of the Federal Reserve's balance sheet management was last summer when the central bank was reducing its holdings through **Quantitative Tightening (QT)** initiated in 2022 This process aims to withdraw excess liquidity from the financial system. The Federal Reserve has stated that QT will end when liquidity is low enough to maintain a firm control over the federal funds rate. At the end of last year, a series of money market rates began to rise, forcing some financial institutions to borrow directly from the Federal Reserve to meet liquidity needs, marking the arrival of this point. The end of QT has calmed the increasingly turbulent money market. Ultimately, the Federal Reserve has reduced its total holdings from a peak in 2022 to the current **$6.7 trillion**. As a technical operation to manage money market rates, the Federal Reserve is currently gradually increasing its asset holdings, continuing until this spring. **Will regulatory rules change?** Wash believes that the Federal Reserve's large-scale holdings distort financial markets, favoring Wall Street interests over those of the general public. He advocates for further shrinking the Federal Reserve's balance sheet to allow liquidity to flow into the overall economy, suggesting that this could enable the Federal Reserve to set interest rate targets at lower levels. However, the challenge to his viewpoint is that as long as banks still require **ample reserves**, shrinking the Federal Reserve's total holdings by withdrawing liquidity from the financial system could lead to the Federal Reserve **losing control over the federal funds rate**, thereby losing its ability to achieve inflation and employment targets. Morgan Stanley analysts stated on February 6 that modifying the rules could reduce banks' demand for liquidity, but at a cost: "A reduction in liquidity buffers **could increase financial stability risks**." J.P. Morgan economists Jay Barry and Michael Feroli informed clients on Wednesday that strengthening the mechanism for the Federal Reserve to provide on-demand loans to financial institutions through repurchase operations might also give banks more confidence to reduce cash holdings. Nevertheless, "we believe the Federal Reserve is still unlikely to restart QT." Some analysts suggest that enhanced coordination between the U.S. Treasury and the Federal Reserve could also provide some room for the Federal Reserve to reduce its holdings. Many Federal Reserve watchers believe that regardless of what Wash publicly states, **financial realities will ultimately temper any push for radical reforms**. Evercore ISI analysts stated in a report on Tuesday: "We believe he will not push for a return to the pre-financial crisis operational mode of Federal Reserve monetary policy," when market liquidity was scarce, and the central bank needed to frequently intervene in the market to manage rates, leading to significant rate fluctuations. They also noted that restarting QT is not under consideration, as it would send a signal to the market that it is unwilling to use the balance sheet as a policy tool in the future, thereby raising current borrowing costs in the bond market ## 相關資訊與研究 - [Buffett says he would care about inflation and the stability of banks if he were at the Fed](https://longbridge.com/zh-HK/news/281187041.md) - [Fed's Powell: The whole idea is to be nonpolitical](https://longbridge.com/zh-HK/news/281046081.md) - [Buffett says he doesn't know if he would cut interest rates if he were at the Federal Reserve](https://longbridge.com/zh-HK/news/281187110.md) - [Why rising oil prices could delay Fed rate cuts in 2026](https://longbridge.com/zh-HK/news/281055979.md) - [Fed's Powell: Makes sense in this time that there is not unanimity](https://longbridge.com/zh-HK/news/281042706.md)