Wall Street is recalibrating fast. When President Donald Trump announced his nomination of former Federal Reserve Governor Kevin Warsh as the next Fed chair, investors initially debated whether he would deliver the aggressive interest rate cuts the president has long sought. But now, the conversation has pivoted to something far larger: the Fed’s $6.6 trillion balance sheet and its sweeping influence on global financial markets.
Warsh, an economist renowned for both his sharp critique of the central bank and his evolving views on monetary policy, has repeatedly called out what he sees as the Fed’s overreach through quantitative easing (QE). His hawkish stance signals that, if confirmed, Warsh may move quickly to shrink the central bank’s balance sheet, an action that could reverberate through Treasury yields, the dollar, and key asset markets.
“Given Warsh’s hawkish DNA, the US president is taking a risk and may not get the steep cuts he wants,” said Gilles Moec, chief economist at AXA Group. “But more fundamentally, it is his stance on the Fed’s balance sheet and profound skepticism of QE that may send the clearest market signal.”
From Short-Term Rates to Long-Term Market Impact
Warsh’s views extend well beyond the conventional debate over short-term rates. During his tenure from 2006 to 2011, he initially supported the Fed’s emergency bond-buying programs, but over time became one of the most vocal critics of the central bank’s continued purchases. He resigned over what he described as “monetary dominance”—a state in which financial markets become excessively dependent on central-bank support.
Market watchers immediately reacted. Yields on longer-term Treasuries ticked higher, the dollar strengthened, and gold and silver suffered steep declines. Analysts say this reflects investors recalibrating from a “debasing-dollar trade”—a strategy of buying assets like precious metals as a hedge against a weakening greenback—to one anticipating a Fed willing to retract stimulus rather than expand it.
“If Warsh truly dislikes balance sheet expansion as a tool to compress yields, the burden may shift to the Treasury,” said Greg Peters, co-chief investment officer at PGIM Fixed Income. Indeed, earlier this year, Trump directed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities to keep borrowing costs down—a clear example of how government entities may be asked to fill gaps if the Fed steps back.
A Modern Fed-Treasury Accord in the Making
Warsh has repeatedly stressed the need to redefine the relationship between the Fed and Treasury, invoking the 1951 Treasury-Fed accord as a model. “We need a new Treasury-Fed accord, like we did in 1951 after another period where debt ballooned and the Fed’s policies conflicted with the Treasury,” he told CNBC.
His prescription is simple: “Run the printing press a little bit less. Let the balance sheet come down. Let Secretary Bessent handle the fiscal accounts, and you can have materially lower interest rates.”
This approach, if implemented, could tighten financial conditions in the near term, forcing banks, investors, and governments to adapt to a smaller Fed footprint. Money markets, in particular, have proven acutely sensitive to even modest shifts in liquidity, as seen in 2019 and late 2025 during episodes of short-term funding stress.
Challenges of Shrinking a $6.6 Trillion Balance Sheet
Warsh faces a monumental challenge. The Fed’s current balance sheet is orders of magnitude larger than during his previous tenure. Adjusting it isn’t as simple as halting purchases; doing so could push short-term rates higher and trigger gyrations in global markets. Analysts at Barclays note that Warsh could employ a combination of strategies:
Stop monthly Treasury bill purchases, allowing funding costs to rise naturally.
Adjust portfolio composition, favoring shorter-term securities to better match liabilities and reduce duration risk.
Even then, Warsh would still be one vote on the Federal Open Market Committee, and consensus-building will be crucial. Some officials support maintaining the ample-reserves framework, which underpins much of the Fed’s current balance sheet strategy, while others may welcome his hawkish check on future asset purchases.
Markets on Notice
Traders are watching closely. Warsh’s nomination has already sent tremors through global markets, and uncertainty remains the overriding theme. “For now, it’s status quo,” said Gennadiy Goldberg, head of US rates strategy at TD Securities. “But markets will remain on edge until Warsh makes his views clearer.”
As debates about rates give way to questions about balance-sheet policy, fiscal coordination, and systemic liquidity, one thing is clear: Warsh’s tenure could redefine not just the Fed, but the very scaffolding of modern financial markets.