US Stock Market | Warsh’s Big Task: Why balance sheet cuts may take years

The US Federal Reserve’s effort to significantly shrink its $6.6 trillion balance sheet may prove to be a long and complex undertaking, potentially extending beyond a single four-year term for incoming Chair nominee Kevin Warsh, according to a Bloomberg report.

A new paper by Stanford finance professor and long-time Fed adviser Darrell Duffie suggests that meaningful reduction in the central bank’s footprint would require a series of structural reforms rather than quick policy shifts. These changes would aim to lower the banking system’s dependence on reserves held at the Fed, which currently stand at around $3 trillion.

The report highlights that while some measures could be introduced relatively quickly, others would involve years of preparation, coordination, and testing. This raises the likelihood that any serious attempt to shrink the balance sheet would unfold over a prolonged period, potentially outlasting Warsh’s tenure if he is confirmed by the US Senate.


According to the report, the proposed roadmap includes four major steps. The first involves greater reliance on temporary open market operations, which could help manage short-term fluctuations in reserve demand and be implemented within weeks.

The second step focuses on revisiting liquidity regulations and supervisory frameworks put in place after the 2008 financial crisis. These rules have played a key role in increasing banks’ demand for reserves. Adjusting them would require careful calibration and clear communication to avoid unintended consequences, particularly around the use of facilities like the Fed’s discount window.

A third proposal involves modifying the interest paid on reserve balances, potentially introducing a tiered system that discourages banks from holding excess reserves. While technically feasible in a short time frame, reaching consensus on its design and implementation could take considerably longer.

The most complex reform would involve redesigning the US payment system to incorporate liquidity-saving mechanisms, similar to those adopted by some other central banks. Such an overhaul would require coordination across the Federal Reserve and commercial banking system, along with extensive testing, making it a multi-year effort.

Warsh, who has been nominated by President Donald Trump, has indicated that reducing the Fed’s balance sheet could create room for lowering interest rates. However, he has not yet provided detailed plans on how this would be achieved. Other policymakers, including Fed Vice Chair for Supervision Michelle Bowman and Treasury Secretary Scott Bessent, have also supported easing liquidity requirements to reduce reserve demand.

Despite growing interest in balance sheet reduction, investors and analysts remain uncertain about the path forward. Duffie’s framework, as cited by Bloomberg, offers one of the clearest outlines so far, but also underscores the scale of the challenge. Substantial progress would likely require coordinated reforms across multiple areas of policy and infrastructure, rather than isolated measures.

The findings reinforce the idea that shrinking the Fed’s balance sheet is not just a matter of policy intent, but one of systemic adjustment, requiring time, consensus, and careful execution to avoid disruptions in financial markets.