Warsh’s Shrinking Fed Could Get Messy Fast: Paul J. Davies

New Federal Reserve Chairman Kevin Warsh has long argued that the central bank should aggressively shrink its $6.7 trillion balance sheet, bloated by years of bond buying. He now has two powerful allies in Treasury Secretary Scott Bessent and the Fed’s vice chair for supervision, Michelle Bowman.

The three share a trio of related aims: to pull the Fed back from its heavy involvement in markets, restore interest rates as the clear lever for monetary policy and change banks’ liquidity rules so that they can lend more instead of holding buckets of spare cash. But there’s a catch. While the first two ...