Waller: Shrinking the Fed's Balance Sheet Is a Long-Term Project
0xBroomberg
What exactly did Warsh say?
At the ECB's annual Sintra forum, Warsh said the Fed spent roughly 18 years building its balance sheet to its current size — shrinking it back cannot be rushed.
He framed the scale as "approaching the realm of fiscal policy." This means → he views the Fed's asset holdings as so large they effectively do the Treasury's job — a role he believes a central bank should not play.
He stressed that interest-rate policy remains the Fed's primary tool, and any balance-sheet decision must be approved by both the FOMC and the full Board of Governors.
What is this new task force?
Warsh announced a dedicated task force on the balance sheet last month. On Wednesday he added that it will include "outside participants."
The member list is expected "next week." In plain terms = the task force is still being assembled — a concrete plan is a long way off.
This signals Warsh's approach: anchor expectations through institutional process first, avoiding any abrupt move that could rattle markets.
Why is Wall Street skeptical of major drawdowns?
The core issue: the financial system now structurally depends on ample reserves. Reserves — high-quality liquid funds banks hold at the Fed — are the liability counterpart of the Fed's securities portfolio.
Barclays strategist Samuel Earl warned that moving toward scarce reserves carries "far more risk than reward" and could "blow up the repo market." This means → if the Fed shrinks too fast, overnight lending markets could seize up in a replay of the 2019 repo crisis.
CIBC's projected timeline: release a plan by year-end → finish public comment by Q2 2027 → earliest actual drawdown in Q4 2027.
What is happening with reserve-management purchases?
The Fed began buying roughly $40 billion per month in short-dated Treasuries last December to ease short-term rate pressure. It cut to $25 billion in April and to $10 billion in June.
Both cuts exceeded market expectations. This means → the Fed is tightening at the margin faster than traders anticipated, but these are technical operations — not formal balance-sheet reduction.
Since December 12, 2024, cumulative purchases total about $310 billion. In plain terms = the Fed is still buying bonds while talking about shrinking — it's just buying more slowly each month.
What does this mean for markets?
Warsh's remarks set a long-term expectations anchor: the direction is toward a smaller balance sheet, but the pace is measured in years, not months.
This reflects a deeper tension: the Fed wants to reduce its footprint in asset markets, yet the financial system has grown dependent on that very footprint.
When real progress arrives depends on two things: the task force's conclusions, and whether market liquidity conditions give the Fed room to act.
Content is for reference only, not financial advice.