Kevin Warsh’s Fed regime change comes with a catch

NEW US Federal Reserve chair Kevin Warsh has long argued that the central bank should aggressively shrink its US$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 is a catch. While the first two goals rely on the third, any attempt to dramatically slim the Fed will drain the reserves that constitute much of the cash Bessent and Bowman think banks should be lending out.