What Kevin Warsh could do with the Fed’s $6.6T QE legacy

President Donald Trump picked Kevin Warsh to run the world’s most powerful central bank on earth in 2026, and the biggest problem on his desk is the Fed’s $6.6 trillion balance sheet. Everyone keeps talking about interest rates, but the real weight is this pile of assets the Fed’s been sitting on for years.

This isn’t new for Kevin. He’s spent over a decade yelling about how big the Fed got. He called out his former colleagues for letting the balance sheet explode after 2008 and during COVID.

When news hit that he might slash it, bond yields jumped, the dollar climbed, and gold and silver took a nosedive. “He’s been very critical of the Fed’s balance sheet expansion,” said Zach Griffiths from CreditSights.

Kevin may cut the Fed’s balance sheet while Trump tries to lower borrowing costs

There’s a problem though.Kevin’s plan doesn’t line up with what President Trump wants. In January, Trump told Fannie Mae and Freddie Mac to buy $200 billion worth of mortgage-backed securities to help people get cheaper home loans.

But Kevin’s against the Fed holding so many assets to keep rates low. “If you take Kevin at his word that he dislikes balance sheet expansion as a way to compress yields, then it means it falls onto Treasury,” said Greg Peters at PGIM Fixed Income.

Treasury Secretary Scott Bessent agrees with Kevin. They both want the Fed to do less and let Treasury handle more. Kevin’s thinking is simple: shrink the Fed’s role, and let the private market breathe. But that could mean higher long-term rates, which is exactly what Trump’s trying to avoid.

Stephen Miran, who’s also at the Fed now and was appointed by Trump, said on Bloomberg TV, “In theory, you can move the short rate to offset whatever you’re doing on the balance sheet… then if that pushes long rates higher, you can cut the short rate to balance things out.”

Back when Kevin was at the Fed from 2006 to 2011, he was one of the early supporters of quantitative easing, but as time went on, he turned against it. He left the Fed because they wouldn’t stop. During the 2008 crash and again in the pandemic, the Fed bought trillions in Treasuries and other debt to keep the system from falling apart.

Kevin’s now saying that policy went too far. On Fox Business, he said, “Run the printing press a little bit less. Let the balance sheet come down. Let Secretary Bessent handle the fiscal accounts, and in so doing, you can have materially lower interest rates.”

Tight liquidity, changing strategy, and Fed infighting

Kevin also told CNBC he wants a new agreement between the Fed and Treasury like the 1951 accord that ended central bank support for war bonds. “We need a new Treasury-Fed accord, like we did in 1951,” he said. The idea is for the Fed and Treasury to openly say how big the balance sheet should be.

Peter Boockvar at OnePoint BFG said, “Anything that reduces the financial footprints of the Federal Reserve would be a good thing.” Still, even he said the balance sheet is “huge in size.” Cutting it won’t be easy.

The Fed’s current system, known as the ample reserves framework, was built after the 2008 crash. It’s designed to make sure banks always have enough cash on hand to stay liquid. Joseph Abate from SMBC Nikko says the size of the balance sheet is really based on what banks need to meet regulatory rules. If Kevin cuts too fast, banks could run into trouble trying to borrow short-term.

At the end of 2025, the Fed started pulling back on its holdings, but that caused problems. More borrowing from the government, plus fewer Fed purchases, drained cash from the system. The Fed had to stop and switch to buying $40 billion in short-term Treasuries every month just to keep markets steady.

Barclays strategists Samuel Earl and Demi Hu say Kevin could end those monthly buys and let funding costs rise, even above the Fed’s target range. Or he could change the makeup of the Fed’s bond portfolio so it holds shorter-term debt. Right now, the average maturity of the Fed’s assets is over nine years, but its liabilities (including reserves and the Treasury’s general account) average about six years.

Even with all that, Kevin doesn’t run the Fed alone. He gets one vote on the Federal Open Market Committee. JPMorgan’s analysts said some other Fed members might back his ideas, but most still support keeping ample reserves. Vail Hartman at BMO said, “a significantly smaller balance sheet would likely require a major shift in the Fed’s existing bank regulatory framework.”

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