Warsh to shrink Fed balance sheet
The guest argued that incoming Fed Chairman Kevin Warsh will shift the central bank toward a pre-2008 scarce reserves regime, shrinking the balance sheet to trade off for lower short-term rates.
The argument
Chris Whalen argued that Warsh, as a supply-sider, views quantitative easing as a 'reverse Robinhood' policy that distorts asset prices. By reducing reserves, the Fed will limit banks' ability to earn easy income simply by parking liquidity at the central bank, forcing a transition to market-driven factors over economic models.
The thesis, stress-tested
✓ What validates it
- ✓The FOMC announces a formal plan to accelerate the reduction of bank reserves
- ✓The Fed adjusts liquidity requirements to allow banks to count discount window access toward regulatory minimums
▸ Risks discussed
- ▸Political pressure from Congress or the White House could limit the Fed's ability to tighten reserves
- ▸Model-centric economists within the Fed may resist the structural shift