Fed Warned on Shrinking Balance Sheet in Lookback at Powell Era

The Federal Reserve should avoid any move to significantly shrink its balance sheet, two prominent economists warned Tuesday — arguing against a strategy that the US central bank’s new chairman has specifically called for.

“There may be changes that would pass a cost-benefit test that would shrink the Fed’s balance sheet somewhat,” Christina Romer and David Romer of the University of California, Berkeley, wrote in a report released by a unit of the Brookings Institution. However, they added, “there would be substantial downsides and no significant upsides to attempts to shrink its size greatly.”

Kevin Warsh, who began his ...