Warsh May Need Five Years to Really Shrink Fed’s Balance Sheet

Federal Reserve Chair nominee Kevin Warsh wants to significantly shrink the US central bank’s $6.6 trillion balance sheet. He’ll probably need more than one term to do it, according to a top financial economist.

Darrell Duffie, a professor at the Stanford School of Business and longtime adviser to the Fed, argues in a new paper that the central bank would need to undertake reforms — including an overhaul of bank liquidity requirements and a redesign of the payment system — if it wants to substantially reduce its footprint in financial markets without causing severe stress.

Darrell Duffie at the Kansas City Fed’s annual Jackson Hole economic symposium on Aug. 24, 2023.

Photographer: David Paul Morris/Bloomberg

Once Warsh is ...