It's Been Over 7 Weeks, and Fed Chair Kevin Warsh Has Failed to Make Any Headway on a Key Central Bank Reform

This has been a momentous year for Wall Street. We've watched the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) climb to record highs, observed the largest-ever initial public offering, and have borne witness to a rare shift in power at the Federal Reserve.

On May 22, President Donald Trump's handpicked successor to Jerome Powell, Kevin Warsh, was officially sworn in as the 17th Fed chair. Warsh wasted little time outlining the laundry list of changes he'd like to implement at America's foremost financial institution. While some of these reforms have taken effect, Warsh has made no progress on his most vocal proposal.

Fed Chair Kevin Warsh delivering remarks. Image source: Official Federal Reserve Photo.

The Fed's bloated balance sheet continues to expand

When testifying before the Senate Banking Committee in April, Kevin Warsh outlined several reforms he'd implement. He discussed changing how the Federal Open Market Committee (FOMC) thinks about inflation and has since launched five specialized task forces, one of which reassesses the criteria and modeling for inflation.

Warsh also railed against the use of forward-looking guidance, arguing that it pigeonholes the central bank into specific monetary policy decisions. At his first FOMC meeting as Fed chair in mid-June, Warsh presented a considerably shorter FOMC statement that was devoid of forward-looking guidance on interest rates.

But the reform Warsh has been most vocal about, deleveraging the central bank's balance sheet and making the Fed a passive observer, is the one he's made no progress on.

Between August 2008 and March 2022, the Fed's balance sheet, comprised primarily of long-term U.S. Treasury bonds and mortgage-backed securities, ballooned from nearly $900 billion to almost $9 trillion. Though a period of quantitative tightening reduced the balance sheet to approximately $6.54 trillion in late 2025, it's been expanding since the start of 2026.

Kevin Warsh Nomination: one reason why market players are interpreting it as a hawkish pick- I agree-is because of his views on the need for a radical balance sheet reduction.

The $31 trillion-dollar American economy demands liquidity & financing needs that are larger than what... pic.twitter.com/zYunGAItV8

-- Joseph Brusuelas (@joebrusuelas) January 30, 2026

As of May 27, the Federal Reserve's banks collectively held $6.704 trillion in assets. By July 1, this figure has grown by roughly $20 billion to $6.725 trillion. Over more than seven weeks, the new Fed chair hasn't made any headway in shrinking the central bank's balance sheet or, in his words, getting "out of the fiscal business."

Any adjustments made to the Fed's balance sheet can have significant consequences for Wall Street. Since bond prices and yields are inversely related, paring down the Fed's balance sheet (i.e., selling trillions of dollars in U.S. Treasury bonds) would be expected to weigh down bond prices, boost yields, and therefore increase long-term borrowing costs.

Additionally, the FOMC doesn't even have to adjust its federal funds target rate to boost interest rates. Simply paring down its balance sheet would be enough to move the needle and somewhat pump the brakes on an inflation rate that jumped to a three-year high of 4.2% in May.

Reasonably low interest rates are the fuel powering the partially debt-financed artificial intelligence (AI) data center build-out. If borrowing becomes costlier and AI infrastructure expansion slows, Wall Street's historically pricey stock market may tumble as valuations and growth expectations are reset.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.